ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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How can market value be calculated based on earnings?

Market Value = P/E x Earnings
Market Value = Earnings / P/E
Market Value = Earnings x Market Price
Market Value = Earnings + P/E

The correct answer is: Market Value = P/E x Earnings

The calculation of market value based on earnings is derived from the relationship between a company's earnings and its price-to-earnings (P/E) ratio. The price-to-earnings ratio is a financial metric that shows the relationship between a company's current share price and its earnings per share (EPS). When calculating market value using this formula, the market value is expressed as the product of the P/E ratio and the company's earnings. This means that by taking the P/E ratio, which indicates how much investors are willing to pay per dollar of earnings, and multiplying it by the company's earnings, you arrive at the market value of the firm. For instance, if a company has earnings of $1 million and a P/E ratio of 20, the calculation would be: Market Value = P/E x Earnings = 20 x $1,000,000 = $20,000,000. This formula is widely used in finance because it provides a clear and straightforward way to estimate a company's market capitalization based on its profitability. It emphasizes the importance of earnings as a driver of market value, reflecting investor expectations for future growth and profitability.