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Shares of Fencer plc are currently valued on a P/E ratio of 8. The company is considering a takeover bid for Seed ltd but the shareholders of Seed have indicated that they would not accept an offer unless it values their shares on a P/E multiple of at least 10
Which 3 of the following are reasons which might justify an offer by fencer plc for the shares of Seed on a higher P/E multiple? Correct answers are
1) Seed has better growth prospects then Fencer
2) Seed has better quality assets than FencerSir P/E ratio formula is Market price per share / EPS. A high P/E ratio indicates low EPS. Then how Seed has better growth prospects?
Yet again, you really should watch the lectures. You keep having my type out what I say in the lectures!!!
If there was no growth, then in Fencer is would take 8 years to get back your investment whereas with Seed it would take 10 years to get back your money. Why on earth would you put money in Seed in that case? The reason is that you expect earnings to grow, and the more you expect them to grow then the more you will pay and therefore the higher will be the PE.
The PE is always an indicator of future expected growth.
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