- 15 Marks
SFM – Nov 2022 – Q6 – Business Valuation Techniques
Explain P/E ratio with data from food retailers, calculate and discuss dividend cover for companies B and C.
Question
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2022
STRATEGIC FINANCIAL MANAGEMENT
Companies A, B and C are in the food retailing sector of the stock market. The following key stock market statistics are provided.
Food Retailers: Ordinary Shares, Key Stock Market Statistics
Company Current Share price (kobo) 52 week high 52 week low Dividend Yield (%) P/E ratio
A 63 112 54 1.8 14.2 B 291 317 187 2.1 13.0 C 187 201 151 2.3 21.1
Required:
a. Illustrating your answer by use of data from the table above, define and explain the term P/E ratio, and comment on the way it may be used by an investor to appraise a possible share purchase.
b. Using data in the above table, calculate the dividend cover for C and B, and explain the meaning and significance of the measure from the point of view of equity investors.
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