Chartered Financial Analyst Level 2
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Company Y has an EPS of $6.50. Based on comparable transaction analysis using the mean valuation ratio, the fair takeover value of the Company Y is closest to:
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A
$14
B
$50
C
$64
Explanation:
Explanation
This question involves comparable transaction analysis using valuation ratios. The key insight is that we need to determine what valuation ratio is being used based on the given EPS and the answer choices.
Step-by-step reasoning:
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Identify the valuation ratio: Since we have EPS (
$6.50) and the answer choices are share prices, we're likely dealing with a P/E (Price-to-Earnings) ratio. -
Calculate implied P/E ratios for each option:
- Option A:
$14÷$6.50= 2.15x P/E - Option B:
$50÷$6.50= 7.69x P/E - Option C:
$64÷$6.50= 9.85x P/E
- Option A:
-
Determine the most reasonable P/E ratio:
- A P/E of 2.15x (Option A) is extremely low and unrealistic for most companies
- A P/E of 7.69x (Option B) is low but possible for some mature, slow-growth companies
- A P/E of 9.85x (Option C) is more typical for many companies and represents a reasonable takeover valuation
-
Conclusion: Based on typical valuation ranges and the fact that this is a "fair takeover value" using comparable transaction analysis, the P/E ratio of approximately 10x (Option C) is the most reasonable and realistic valuation.
Therefore, the fair takeover value is closest to $64.
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