The requirement here was to calculate the value of a company (Corhig Co) using the price/earnings ratio (PER) method, discussing the usefulness of the variables used. Many students struggled with this question.

One the face of it, the PER valuation method is simple. Find an earnings figure, or earnings per share (EPS) figure, multiply by a PER and you have either the value of the company (if you used earnings) or a share price (if you used EPS). The number of issued shares of Corhig Co was not given in the question and some answers invented a figure, but as the requirement was to calculate the value of the company, the number of shares was not needed.

In reality, the PER method presents a number of problems, and this was illustrated by the question, which provided forecast earnings for the end of year 1, the end of year 2 and the end of year 3. What earnings figure should be used to give a PER value? It is better to use future earnings than past earnings and as the question shows, a value for future earnings should not be selected mechanically, but after careful thought.