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(a) An assets basis valuation
If we assume that a purchaser would accept the revaluation of assets by the directors and that the
other values in the statement of financial position are used, then the valuation of equity would be
as follows:

Value per share (1m shares) = $3.23
Earning based valuation
If the purchaser believes that earnings over the last five years are an appropriate measure for
valuation, we could take average earnings in these years; however profits are showing stable
growth so we can take the latest profits figure of $605,000.
Industry average P/E ratio of 12 could be used to value these profits, but Eton is an unquoted
company and it is reasonable to reduce the P/E ratio by about 1/3 to say 8 to reflect this.
Share valuations based on past earnings basis are as follows:

Range of values
Ultimately the amount that will be paid will depend upon what a buyer is willing and able to pay.
However, the minimum that the directors will require will be indicated by the realisable value of
the assets ($3.23), and the maximum will be the approximate value of Eton as a listed company
($7.26 using the P/E of 12). Other techniques should also be used – notably discounted value of
future cash flows. All the techniques have drawbacks but will help to act as a starting point for
negotiations.