Free Mathsoul Posters' Worksheets, Celia Right Price Cafe PE Ratios Graphs

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Celia's Mathsoul Poster

Ceilia is selling her restaurant and hopes to make a $200,000 profit if the intended PE ratio is achieved.

Context
Celia bought a rundown cafe for $40,000. The annual earnings (after the previous owner was paid for their work in the business) was then only $20,000. So the ratio of price paid to earnings was 2:1.

This price to earnings ratio is usually called a PE (in this case a PE of 2). Note: Always be careful to ensure the earnings data used is after the payment of wages or salary to the owner if the owner works in the business.

When Chef Joe joined he lifted meal quality, and along with that repeat business, so this year’s earnings are up dramatically, to an estimated $80,000.

Plans to Sell
Celia plans to sell the cafe soon and says “a selling price based on a PE of 3 (times this years earnings) seems achievable, as annual profit is now growing rather than flat.”

Celia's Poster Questions
Q1. What is Celia’s intended selling price?
Q2. If Celia achieves a sale price of only $150,000 for the business, what PE (on this years earnings) does that represent?
Q3. Draw a graph with annual earnings of $40,000 and $80,000 on one axis, and PE ratios of 2 and 3 on the other. What is represented by the area of the rectangle contained by these parameters?
Q4. Search out a listing of small businesses for sale local to you, and find out what PE ratios are being sought? For one business offered for sale, on a new graph, using one axis each for PE and earnings as in Q3, plot the requested selling price and PE ratio. Also plot two other points representing two possible future business scenarios (a) if the PE ratio goes up by 1, and the profit up by 15%, and (b) if the PE ratio goes down by 1 and the earnings down by 15%. Draw rectangles to show change in business value (or profit on sale) for these two scenarios.
Q5. Examine a newspaper or internet listing sales of shares in publicly listed companies in your and one other country. What is the range of PE's involved in the selling prices?

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