In this problem, I see that to calculate the market value of Matravers Tech, they use relevant sector Price earnings ratio of 18, then compare with the present value of forecast FCF to Matravers Tech . However, I see that P/E technique in valuation is usually used to value market value of equity of a company, is not used to value the full market value of company( which includes market value of equity and market value of debt). Therefore, I want to ask, P/E can be used to value total market value of company in AFM exam, or whether there is a mistake in this problem?
Ask the Tutor ACCA AFM
Westparley (AFM exam in March/june 2020)
2y ago#1You are correct in stating that the PE ratio is used to value the equity.
However in this question what the examiner has done is correct, partly because they are only selling Maltravers Tech's future earnings (they are not selling the debt) and also because the question specifically says to value using the PE ratio.
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