Question

1a. Discuss the use of the price/earnings ratio and dividend growth methods of determining the value of a target company?

1b. Explain why a company may wish to divest part of its operations?

1c. Discuss the use of the price/earnings ratio and dividend growth methods of determining the value of a target company?

Answer 1

Answer to Q. 1a. & 1c

Use of P/E ratio in determining the value of target company :

i) It helps in determining investors the market value of stock in relation to its earnings.Higher PE ratio means stock price is high in relation to its earnings.

ii) Higher PE ratio also indicates the higher growth of company in relation to its earnings.

iii) It helps in determining whether company is undervalued or overvalued in relation to other companies in the same industry.

Use of dividend growth methods for determining value of Company :

Dividend payment by company can be used as a valuation method for determining the value of the company considering the expected growth in the divend or no growth.Expection in the form of dividend helps in valution of stock of the company.One of the most popular method is Divided discount model for valuing the same.

Answer to Q. 1b

Due to following reasons company may wish to diversify it's part operations :-

i) In order to separate it's performing and non performing business unit separately to protect the value of performing unit.

ii) In order to obtain funds for specific unit.

iii) To enhance stability in particular business unit.