ACCA FM · Chapter 13 · Question 7 of 9
A company has annual earnings of $3m. Similar companies have an earnings yield of 12.5%. What is the estimated value of the company's equity using the earnings yield method?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $24.0m
Explanation
Value = earnings / earnings yield = $3m / 0.125 = $24.0m. The earnings yield is the reciprocal of the P/E ratio, so this is equivalent to using a P/E of 8. Multiplying earnings by 12.5 treats the yield as a P/E ratio.
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