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respected john sir,
i am blessed to know about this website and i cant thank you enough for being an angel for me in my preparation for coming december session exam. i have watched your lectures and also search first before asking any question to see if someone has already asked it to you so that you don’t need to answer me again.the mcq number 212 DD CO-bpp kit (latest edition) writes PE ratio of a company as 12 and its competitor’s earnings yield as 10% and asks if compared with the competitor earning yield and p/e ratio would be higher or lower.
i found it so strange. they simply divided 1 by the values given and reached to the answer :/ how’s it so?and i do know about the below derivations, still couldn’t figure out:
PE ratio method-
value of company= total earning x PE ratio
value per share = EPS x PE
Earnings yield method-
value of company = total earning x 1/earnings yield
value pr share = EPS x 1/earnings yieldthanks in advance sir. writes PE ratio of a company as 12 and its competitor’s earnings yield as 10% and asks if compared with the competitor earning yield and p/e ratio would be higher or lower.
i found it so strange. they simply divided 1 by the values given and reached to the answer :/ how’s it so?and i do know about the below derivations, still couldn’t figure out:
PE ratio method-
value of company= total earning x PE ratio
value per share = EPS x PE
Earnings yield method-
value of company = total earning x 1/earnings yield
value pr share = EPS x 1/earnings yieldthanks in advance sir.
PE ratio = MV / EPS
Earnings yield = EPS / MV
So PE ratio is simply 1 / earnings yield 🙂
Oh ok got it now. Thank you sir. Need to know this too:
234 objective question (bpp kit-latest edition=> cbe style OT case Close Co (12/11) )
There’s an earnings growth rate given and value of company using PE method including earnings growth rate is calculated as: earnings x (1+g) / earnings yield – g
But the answer completely ignores the earnings growth and uses the usual earnings/earnings yeild formula.
Why is it so?
And sir by the way, To ask this kind of questions further inside a topic, do i need to open a new topic or this way is fine too?When using the PE method or the earnings yield method, we always ignore growth.
Growth is only relevant when using the dividend valuation i.e. the dividend growth model.
I would suggest that you watch my free lectures on the valuation of securities, because this is all explained there (and I cannot type them all out here).
Please start a new thread when it is a question on a different topic, or on a different revision kit question.
sir actually only in the kaplan text book (page 686) there’s a text which says that “to incorporate earnings growth in the earnings yield formula” the method used is:
earnings x (1+g) / earnings yield – g
they also have a test your understanding 3 in same chapter 20 (business valuations & market efficiency) which is same as the objective question i asked about. and they, although using earnings yield method, incorporated growth in the formula like i wrote above.
sir why is kaplan text contradicting your lectures, notes, bpp kit :/Arithmetically then of course we can incorporate growth into the earnings yield formula, but we don’t – it would be nonsense. (In the exam we don’t unless obviously the question specifically says to do so, which it won’t)
If Kaplan say that we must incorporate it then they are writing nonsense!
Also the BPP question you referred to in your earlier question was not on earnings yield anyway – it was on dividend valuation where of course we incorporate growth.
Again, I do suggest that you watch the lectures. They are a complete course for paper F9 and cover everything needed to be able to pass the exam well.
Sir i have watched your videos again yesterday and yet didn’t get it cleared as i was sure that kaplan text book does include growth in earnings yield method. That is what confused me and moreover the question i referred to has both dvm and earnings yeild 🙁 a common data is given for both the questions (including 3 other) and 233 no. asks to calculate business value using dvm and the very next question asks to calculate business value using earnings yeild mehod. But since you are saying that growth shouldn’t ever be imcorporated in any other method except dvm so i won’t rely on Kaplan book 🙂 I’ll consider it wrong 🙂 it’s clear now 🙂 thank you so much for your precious time sir.
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