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Hello
In relation to finance restructuring i am faced with an example where, after calculating earnings after tax ($630k after restructuring) they state P/E discounted by 30%=10. Which they multiplied the earnings by, giving $6.3m.
Could you kindly explain why they did this and how they come to 10? In the question they state that the P/E ratio of the industry is 14.3 and corporation tax is 30% would this be of help?. Im not sure if I have given you enough details from the question.Thank you very much
It is difficult for me to answer with certainty without seeing the question (if it is either a past exam question, or in the BPP Revision Kit, then tell me the name and which exam and I will be able to find it).
However, there is no reason for the PW to be discounted because of tax.
I would guess that the reason is that it is an unquoted company, whereas the PE for the industry will be for quoted companies. An unquoted company would be expected to have a lower price per share because the shares are not tradeable, and so we either apply the industry PE and then reduce the price a bit, or we apply a reduced PE.
However there is no ‘rule’ as to how much to discount it by.If this is the situation here, then the important thing would be to say that the price will be lower because it is unquoted, and to state as an assumption that you are reducing it by 20% or 30% or whatever. There is rarely just one ‘correct’ answer in P4, and if you state your assumptions then you will still get the marks.
Yes its an ltd. what they did is 14.3*(1-30%)= 10,01. Ill make sure to state the assumption.
thank you
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