The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public and issuing one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.

Question

Quizplus · Accepted Answer

The value of the private firm can be estimated by multiplying its earnings by the average P/E ratio of publicly traded firms in the same industry.

Value = Earnings x P/E ratio

Value = 5 million euros x 12

Value = 60 million euros

If the private firm issues one million shares, its value per share will be 60 million euros divided by one million shares, which is 60 euros per share.

Therefore, the value of the private firm if it goes public is 60 million euros (or 60 euros per share).

The Earnings of a Private European Firm Are €5 Million