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A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currentlypaid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000each yearin total.
A suitable Price/Earnings (P/E)ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?
Suggested Answer: D
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4 comments · newest first
JO
Jose
39 minutes ago
If I recall correctly, we need to calculate the adjusted profit first, then apply the P/E ratio. I think the answer should be around $5 million, but I’m not sure which option it is.
LA
Laura
5 days ago
I think we practiced a similar question where we had to adjust for tax implications. The P/E ratio seems straightforward, but I’m not confident about the profit adjustments.
LE
Leonor
10 days ago
I'm a bit unsure about how the increased salaries will affect the profit figure we should use. Do we subtract that from the current profit?
TE
Telma
16 days ago
I remember we discussed how to adjust profits for ongoing expenses like salaries before calculating the P/E ratio.