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Basic Question 5 of 7
Which of the following statements is the LEAST ACCURATE with respect to the use of earnings yield (E/P)?
II. When ranking stocks in terms of valuation, E/P may be used even if earnings are negative for certain firms.
III. Earnings yield can be positive even when earnings are negative.
IV. A high earnings yield would be preferred, holding everything else constant.
I. Earnings yield should increase as the P/E ratio decreases for a stock.
II. When ranking stocks in terms of valuation, E/P may be used even if earnings are negative for certain firms.
III. Earnings yield can be positive even when earnings are negative.
IV. A high earnings yield would be preferred, holding everything else constant.
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan2 | Is II correct? |
| mdags | Re: II => E/P maintains high-to-low rank even when comparing firms w/ negative earnings. P/E does not. |
| ikaneng | IV: why would it be preferred? |
| JimM | ikaneng -- high earnings yield is preferred because you get more bang for your investment dollar, a bigger claim on earnings. |
| Tony1234 | E/P is the inverse of P/E. low P/Es are a sign of a stock being relatively undervalued. therefore a High E/P is also a sign of a stock being relatively undervalued. |
| past1sttime | 1 should be false if earnings r negative earnings yield will not increase and the pe ratio will decrease |
| oregan | you should assume they are all positive by default. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.