Doubt

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March 1, 2018 at 6:36 pm #439607
niki27
Member
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Dear sir,
I have a doubt with this question.
The profit before tax for a company is $460,000 and it includes one-off loss $40,000 from bankrupt customer .and it has 250,000 equity shares in issue. Tax rate is 25%. If the earnings yield is 40%, what is the total market value of the company?
Now in the answer, the one off loss of 40000 is also included in the earnings. Also, why is market value calculated as Earnings × 1 ÷ earnings yield?
Thanks!
March 2, 2018 at 9:19 am #439656
John Moffat
Keymaster
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The market value depends on future expectations. Since the loss was a one-off, they will not be expecting it to continue in the future.
The earnings yield = earnings / market value. If you rearrange, then market value = earnings / earnings yield.
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