01 September 2011

Valuation of trading entities

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. A trading entity has a price/earnings ratio of 5. Its profits before tax are GBP270,000 per annum and a tax charge for the year of GBP30,000. What value would be placed on the entity using a p/e ratio basis?

  2. A trading entity has a price/earnings ratio of 16. The profits before tax for the year are GBP1,750,000 and a tax charge for the year is GBP500,000. Bad debts included in these figures were GBP650,000 and the entity usually has bad debts of GBP150,000 each year. What value would be placed on the entity using a p/e ratio basis?

  3. When valuing a trading company which is part of a group of companies, which of the following expenses may result in the reported post-tax earnings figure being amended before it is used in the p/e ratio calculation to calculate the value of the company?

  4. In a trading partnership one of the four partners who own 15% of the equity in the partnership has a dispute with the other three partners. What is the maximum discount that would be appropriate to use when valuing the 15% interest in the partnership?

  5. Why is a single holding of 75% of a private limited company more valuable than the sum of two separate holdings of say 64% and 11%

  6. In which of the following situations would it not be appropriate to use the asset based approach to value a trading private company?

  7. In a private limited company total profit after tax is GBP900,000. Tax charge is GBP100,000 and this figure includes rental income of GBP40,000 net of rental expenses. The balance sheet includes investment property at market value of GBP800,000 and other net assets of GBP4,000,000. The price/earnings ratio of the core business of the company is 9. What is the value of the company?

  8. In a private limited trading company which has 100 issued shares, the shareholders are as follows: Mr A 26 shares, Mr B 26 shares, Mr C 24 shares, Mr D 16 shares and Mr E 8 shares. Mr E has decided to offer his shares to the offer shareholders. Assuming the holding does not have strategic value, there are no disputes, it is not as a result of a divorce and there is no shareholder agreement or other documentation that specifies how the shares should be valued. Which of the following range of discounts would be appropriate to use on the full pro rata value of the company when valuing Mr E's shares?

  9. In a private limited trading company which has 100 issued shares, there are 11 shareholders with Mr A owning 50 shares and 10 other shareholders owning 5 shares each. Mr A has decided to offer his shares to the offer shareholders. Assuming there are no disputes, it is not as a result of a divorce and there is no shareholder agreement or other documentation that specifies how the shares should be valued. Which of the following range of discounts would probably be appropriate to use on the full pro rata value of the company when valuing Mr A's shares?

  10. A private limited company (call it A Ltd) is a wholly owned subsidiary of B Ltd. Total profits of A Ltd after tax is GBP600,000 and this profit is after deducting a management charge from B Ltd of GBP150,000, whereas a commercial arm's length charge from B Ltd to A Ltd for management charges would be GBP60,000. The price/earnings ratio of the business of A Ltd is 14. What is the value of the A Ltd?

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