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when valuing a company ( just one company not the value of the combined company) we use pe ratio of that particular company
however when valuing combined company we use pe ratio of parent
1) is that right? this is exactly what was done by the examiner in question 3 june 2014 when target company was valued by multiplying earnings with its own pe ratio
2) however under what circumstances do we use pe ratio of a similar company (instead of a target company) when valuing a target company
There are no rules for this. It depends on the wording of the question and the information in the question.
If the management of the acquiring company think that they will be able to manage the target company better, then they will use a higher PE ratio (because they will expect to be able to achieve higher growth).
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