CIMAPRA19-F03-1 Exam - Topic 3 Question 120 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 120
Topic #: 3

The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.

Their calculation is:

Value if the company's equity = $6 million x 10 =$60 million where.

$6 million is the company's reported profit before interested and tax in the most recent accounting period and

10 is the average price-earnings ratio for all listed companies

Which THREE of the following are weakness of this valuation?

BThe price-earnings valuation method gives a value for the entire entity not Just a value of the equity.

DProfit after tax should have been used in the calculation instead of profit before interest and tax.

EThe price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies

AThe equity result needs to be uplifted in recognition that this is an unlisted company.

CA forecast of sustainable profit should have been used instead of a historical figure

Show Suggested Answer

Suggested Answer: D, E, C

by Veronika at Jan 28, 2026, 06:38 PM

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Jesusa

5 days ago

I'm not entirely sure, but I think relying solely on reported profit might ignore other important factors like cash flow or future growth potential.

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Lyda

10 days ago

I remember that using the average price-earnings ratio can be misleading if the company is in a different industry or has unique risks.

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I've seen questions like this before. The main problems are likely the use of the industry average P/E for an unlisted firm, and the fact that one year's profit may not reflect the company's true earning power. I've got a strategy to tackle this.

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Lili

20 days ago

Hmm, I'm a bit confused. How do we know the industry average P/E is 10? And is using just one year's profit really a weakness? I'll have to think this through carefully.

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Darci

26 days ago

This looks straightforward. The main issues are using the industry average P/E ratio for an unlisted company, and relying on just one year's profit figure. I feel confident I can identify the three weaknesses.

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Ashlyn

1 month ago

Okay, let me think this through. The key weaknesses could be that the company is unlisted, so the P/E ratio for listed companies may not apply. Also, one year's profit might not be representative.

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Casie

1 month ago

I'm not sure about the price-earnings ratio approach. Seems like we need to consider other factors too, like the company's growth potential and industry comparisons.

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CIMAPRA19-F03-1 Exam - Topic 3 Question 120 Discussion

Contribute your Thoughts:

Jesusa

Lyda

Kelvin

Lili

Darci

Ashlyn

Casie