(b) An assets basis valuation
Apart from practical problems of estimating the realisable value of assets, this method ignores
the value of intangible assets such as reputation that Eton will have built up over the past 30
years. Profits and the projected profit growth of 4.88% are also ignored.
Earning based valuation
Using the price-earnings ratios of quoted companies to value unquoted companies may be
problematic.
Finding a quoted company with a similar range of activities, growth potential and gearing levels
may be difficult. Quoted companies are often diversified.
A single year's P/E ratio may not be a good basis, if earnings are volatile, or the quoted
company's share price is at an abnormal level due for example to the expectation of a takeover
bid.
We are told P/E ratios for the industry as a whole which may not be a reflection of Eton Co’s
growth potential.
Current earnings in 20X7 may have been influenced by one-off transactions such as profits on
disposal of an asset.
Dividend valuation method
The new owners of the business may change the dividend policy or the future dividend growth
rate. So the value indicated by this method is only an indication of the value of the company under
its current management; it is most appropriate for minority shareholders who have no power to
change the dividend policy or the future dividend growth rate.
The estimate of growth is based on the past, future growth will be influenced by the economy,
new competition and by the retirement of three key directors.
Recommendation
The earnings basis is probably the most relevant here because the new owners are likely to
change dividend policy and growth rates, and because the company is being sold as a going
concern.
Therefore the value of $4.84 per share is the best indicator of the value of Eton Co. |
