CIMA F3 Exam With Confidence Using Practice Dumps

When valuing an unlisted company using a P/E ratio from a similar listed company, we normally reduce the proxy P/E to reflect the extra risk and reduced attractiveness of the unlisted investment.

A. Relative lack of marketability – Unlisted shares are harder to sell and usually take longer to realise, so investors demand a higher return, i.e. a lower P/E. ✔

B. Lower level of scrutiny and regulation – Unlisted companies face less disclosure and governance requirements, so information risk is higher. Greater risk ⇒ lower valuation multiple ⇒ reduced P/E. ✔

C. Smaller and less established – Unlisted companies tend to be smaller, less diversified and less stable, so investors again expect a higher return, implying a lower P/E. ✔

D. Control premium not included – If the proxy P/E excludes a control premium but you are valuing a controlling stake, you would increase the P/E, not reduce it. ✘

E. Higher forecast earnings growth – Higher expected growth justifies a higher P/E, not a lower one. ✘

F. One-off profit item in latest earnings – This should be dealt with by adjusting the earnings, not by cutting the P/E multiple. ✘

So the three factors justifying a reduction in the proxy P/E are A, B and C.

 C – More cash = able to react quickly to unexpected investment opportunities.

 D – Cash buffer reduces the likelihood of liquidity problems in a downturn.

 E – If excess cash were returned, markets might read it as “no good growth opportunities”, so retaining avoids that negative signal.

A. Equity instead of debt reduces financial risk → ✅ True

B. Equity will create pressure for higher future DPS → too strong / not necessarily always → ❌

C. Debt always increases EPS → only if returns > cost of debt → ❌

D. Retained earnings is the cheapest form of equity finance (no issue costs) → ✅ True

E. More debt → higher financial risk → higher cost of equity (MM with gearing) → ✅ True

F. Debt is always preferable → clearly ❌

Correct three:

A, D, E\boxed{A,\ D,\ E}A, D, E​