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Identify and elaborate the main difficulties associated with Price Earnings (P:E) Ratio and Discounted Cash Flow...

Identify and elaborate the main difficulties associated with Price Earnings (P:E) Ratio and Discounted Cash Flow (DCF) for valuing companies which are not quoted in the Stock Market?

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Answer #1

The main difficulties associated with PE ratio and DCF for valuing companies which are not quoted in the Stock Market are :

  • As the shares are not traded in the stock market, the market price is not known. The PE ratio is difficult to estimate because the market value per share cannot be known. It can only be estimated, but with uncertainty.
  • The cost of equity is difficult to determine because the share price is unknown. The beta of the stock is also difficult to estimate for the same reason
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