BUSF_A01.qxd

(Darren Dugan) #1

Chapter 16 • Small businesses


Clearly, most of the points that apply to the dividend yield approach also apply to
this one. The P/E approach does overcome the question of dividend policy, which
Modigliani and Miller (as we saw in Chapter 12) assert is irrelevant in any case.
In practice, this approach tends to be used to value a majority holding where the
shareholder has some control over the business.

Net assets
Here the approach is to value the business by reference to the individual values of its
assets.

Bearing in mind that:

P/E =

then the price of a share of D Ltd, pD, is given by:

12 =

pD=£3.60 per share

pD
0.30

Current market price per share
After-tax earnings per share

Solution

The balance sheet of E Ltd is as shown below. What is the value of each E Ltd share?

Balance sheet of E Ltd at 31 December
£m
Non-current assets 11
Current assets 25
36

£m
Equity
Ordinary shares of £1 each 8
Retained profit 7
Total equity 15
Long-term loans 6
Current liabilities 15
36

Example 16.3

If pE is the price of an E Ltd share, then:

pE=

=£1.875

11 + 25 − 6 − 15


8

Solution
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