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

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 and10 is the average price-earnings ratio for all listed companiesWhich THREE of the following are weakness of this valuation?
D) Profit after tax should have been used in the calculation instead of profit before interest and tax. and E) The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies and C) A forecast of sustainable profit should have been used instead of a historical figure
B) The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.
A) The equity result needs to be uplifted in recognition that this is an unlisted company.

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

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 120
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

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?

Show Suggested Answer Hide Answer
Suggested Answer: D, E, C

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

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Deangelo
1 month ago
Agreed, economic conditions can change valuations quickly.
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Louisa
2 months ago
Also, past profits may not predict future performance.
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Ceola
2 months ago
True, it doesn't reflect industry specifics.
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Salena
2 months ago
Using a generic P/E ratio is risky.
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Novella
4 months ago
This method overlooks future growth potential, right?
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Desiree
4 months ago
What about industry-specific factors? They matter a lot!
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Christiane
4 months ago
Wait, they used the average P/E for all listed companies? That seems off.
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Jaclyn
4 months ago
Totally agree, it doesn't reflect the company's specific risks.
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Fairy
4 months ago
Using a generic P/E ratio can be misleading.
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Adell
4 months ago
The valuation assumes a one-size-fits-all approach, but every company is unique.
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Helga
5 months ago
Haha, I bet the directors used a calculator from the 90s to do this valuation.
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Yoko
5 months ago
The valuation doesn't consider the company's capital structure and debt levels.
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Suzi
5 months ago
Using the average P/E ratio for listed companies may not be appropriate for an unlisted company.
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Sharita
5 months ago
The valuation doesn't account for the company's specific risk profile and growth potential.
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Graciela
5 months ago
I think one weakness could be that the P/E ratio is based on historical data, so it might not reflect current market conditions or investor sentiment accurately.
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Brianne
5 months ago
I practiced a similar question where we discussed how unlisted companies might not have the same market visibility, which could affect the accuracy of the valuation.
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Jesusa
6 months 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
6 months 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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Kelvin
7 months ago
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
7 months 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
7 months 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
7 months 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
7 months 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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Paris
29 days ago
Industry comparisons are crucial too!
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Gracia
1 month ago
Agreed, it doesn't account for growth potential.
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Marti
1 month ago
The price-earnings ratio can be misleading.
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