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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?
Suggested Answer: D, E, C
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26 comments · newest first
DE
Deangelo
3 months ago
Agreed, economic conditions can change valuations quickly.
LO
Louisa
4 months ago
Also, past profits may not predict future performance.
CE
Ceola
4 months ago
True, it doesn't reflect industry specifics.
SA
Salena
4 months ago
Using a generic P/E ratio is risky.
NO
Novella
6 months ago
This method overlooks future growth potential, right?
DE
Desiree
6 months ago
What about industry-specific factors? They matter a lot!
CH
Christiane
6 months ago
Wait, they used the average P/E for all listed companies? That seems off.
JA
Jaclyn
6 months ago
Totally agree, it doesn't reflect the company's specific risks.
FA
Fairy
6 months ago
Using a generic P/E ratio can be misleading.
AD
Adell
6 months ago
The valuation assumes a one-size-fits-all approach, but every company is unique.
HE
Helga
7 months ago
Haha, I bet the directors used a calculator from the 90s to do this valuation.
YO
Yoko
7 months ago
The valuation doesn't consider the company's capital structure and debt levels.
SU
Suzi
7 months ago
Using the average P/E ratio for listed companies may not be appropriate for an unlisted company.
SH
Sharita
7 months ago
The valuation doesn't account for the company's specific risk profile and growth potential.
GR
Graciela
7 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.
BR
Brianne
7 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.
JE
Jesusa
8 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.
LY
Lyda
8 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.
KE
Kelvin
9 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.
LI
Lili
9 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.
DA
Darci
9 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.
AS
Ashlyn
9 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.
CA
Casie
9 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.
PA
Paris
3 months ago
Industry comparisons are crucial too!
GR
Gracia
3 months ago
Agreed, it doesn't account for growth potential.
MA
Marti
3 months ago
The price-earnings ratio can be misleading.