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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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Novella
15 days ago
This method overlooks future growth potential, right?
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Desiree
20 days ago
What about industry-specific factors? They matter a lot!
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Christiane
26 days ago
Wait, they used the average P/E for all listed companies? That seems off.
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Jaclyn
1 month ago
Totally agree, it doesn't reflect the company's specific risks.
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Fairy
1 month ago
Using a generic P/E ratio can be misleading.
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Adell
1 month ago
The valuation assumes a one-size-fits-all approach, but every company is unique.
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Helga
2 months ago
Haha, I bet the directors used a calculator from the 90s to do this valuation.
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Yoko
2 months ago
The valuation doesn't consider the company's capital structure and debt levels.
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Suzi
2 months ago
Using the average P/E ratio for listed companies may not be appropriate for an unlisted company.
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Sharita
2 months ago
The valuation doesn't account for the company's specific risk profile and growth potential.
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Graciela
2 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
2 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
3 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
3 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
4 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
4 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
4 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
4 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
4 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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