Page 402 - FM Integrated WorkBook STUDENT 2018-19

Chapter 20

Which P/E ratio?

An unquoted company will not have a market-driven P/E ratio, so
an industry average P/E, or one for a similar company, will be used
as a proxy.

If a quoted company proxy is used, it may need to be adjusted to
reflect the position of the business being valued:

Private company shares are less liquid – adjust down

The company may be more risky than the proxy – adjust down

The company may have a higher projected growth level – adjust
upwards.

Arbitrary rule – 10% per reason

Proxy P/E ratios are also sometimes used when valuing a quoted
company too – if a quoted entity's own P/E ratio is applied to its
own earnings figure, the calculation will just give the existing share

price.

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