ACCA Financial Management (F9) Certification Practice Exam

Which valuation method is primarily used to determine the controlling interest in a company’s shares?

1. Dividend Valuation Model

2. P/E ratio method

3. Earnings yield valuation

4. Market Capitalisation

The correct answer is: P/E ratio method

The P/E ratio method is predominantly used to assess the value of controlling interests in a company’s shares because it provides a clear perspective on how much investors are willing to pay for each unit of earnings. The price-to-earnings (P/E) ratio reflects investor expectations regarding future growth and profitability, which are crucial when evaluating controlling interests, as such interests often come with greater influence over company decisions and governance. When calculating the value based on the P/E ratio, analysts typically use the company's earnings per share (EPS) and multiply it by an appropriate P/E multiple, which may be derived from comparable firms or the industry's average. This method helps in estimating the value that investors are placing on the earnings potential of the company, which is a key consideration when controlling interest is at stake. While other methods, such as market capitalization, provide a snapshot of the company's overall value in the market, they may not fully encapsulate the intrinsic value derived from controlling interests. Dividend valuation models focus on future dividends rather than earnings and can overlook growth prospects, which makes them less optimal for controlling interest evaluation. Earnings yield valuation is similar but less commonly adopted for assessing control due to its reliance on expected earnings against price rather than market sentiment on growth. In summary, the