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Corporate Financial Reporting · Valuation of Shares (including Determination of Goodwill)

Yield and Earnings-Based Methods of Share Valuation

Updated 11 October 2026 · Fact-checked

Yield and earnings-based methods value a share from the income it earns, not from assets. You find the maintainable profit or dividend, then divide by the normal rate of return (yield), or multiply EPS by a suitable P/E ratio. Value per share = expected rate ÷ normal rate × paid-up value, or EPS × P/E.

Understand Yield and Earnings-Based Methods

Asset-based methods ask what a company owns. Yield and earnings-based methods ask what a company earns. A minority investor cannot control assets, so what matters to them is the income stream, mainly dividends. A controlling investor cares about total profits.

The dividend yield method values a share by comparing the dividend it is expected to pay with the dividend rate investors normally expect from similar companies. If your company pays 20% and the normal return is 10%, each ₹10 share is worth ₹20. It suits small holdings where the investor has no control over dividend policy.

The earnings yield method works the same way, but uses the profit that is available to equity shareholders, whether or not it is distributed. It suits controlling stakes. You first compute maintainable profit: the average future profit the business can sustain. Start from past profits, remove non-recurring items, adjust for known changes, deduct tax, and deduct preference dividend. Divide by the normal earnings rate to get the value of the equity.

The P/E method is the same idea written as a multiple. EPS is the profit for equity shareholders divided by the number of equity shares. P/E is the reciprocal of the earnings yield. A normal earnings yield of 12.5% means a P/E of 8. Value per share = EPS × P/E.

All these methods depend on judgement: which profit is maintainable and which rate is normal. The exam gives you the rate, or tells you how to derive it from a comparable company. Your job is to apply it consistently and state your assumptions.

Fair value under Ind AS 113 is a market-based measurement using assumptions that market participants would use when pricing the asset or liability. Income-based share valuation follows the same spirit, but this chapter's methods are valuation techniques for exam purposes and are not a substitute for the Ind AS 113 hierarchy.

Key rules to remember

Value per share, dividend yield method
Value per share = (Expected dividend rate ÷ Normal rate of return) × Paid-up value per share
Use for minority holdings. The expected rate is dividend as a percentage of paid-up value.
Value per share, dividend in rupees
Value per share = Expected dividend per share ÷ Normal yield
Use when the dividend is given in rupees per share.
Maintainable profit
Average adjusted profit after tax − Preference dividend = Profit available to equity shareholders
Adjust for non-recurring items, abnormal items and expected changes before averaging.
Value of equity, earnings yield method
Value of equity = Maintainable profit for equity ÷ Normal earnings yield
Divide by the yield as a decimal, for example 12.5% = 0.125.
Earnings per share
EPS = Profit available to equity shareholders ÷ Number of equity shares
Use the weighted number of shares if the question says shares changed during the year.
P/E method
Value per share = EPS × P/E ratio
P/E ratio = 100 ÷ normal earnings yield (%).
P/E ratio from market data
P/E ratio = Market price per share ÷ EPS
A comparable company's P/E is often used to value an unlisted company.

How to solve Yield and Earnings-Based Methods questions

Follow the same order each time. It stops you mixing up profit, dividend and yield.

  1. 1Read which method the question asks for and whether the holding is minority or controlling.
  2. 2Identify the maintainable figure: for dividend yield, the expected dividend rate; for earnings methods, the maintainable profit.
  3. 3For earnings methods, take each year's profit, remove non-recurring items, adjust for stated changes, deduct tax, then average (use weights if the question gives them).
  4. 4Deduct preference dividend to get profit for equity shareholders.
  5. 5Find the normal yield or P/E. If the question gives a comparable company, derive it from that.
  6. 6Apply the formula: dividend rate ÷ yield × paid-up value, or profit ÷ yield, or EPS × P/E.
  7. 7Convert to value per share by dividing by the number of equity shares, if needed.
  8. 8State your assumptions and the final value clearly.

Quickest way: Yield to P/E shortcut

When to use it: Use when the question gives a normal rate and asks for value per share on an earnings basis, or gives P/E and asks for the yield.

  1. Convert the normal yield into a multiple: P/E = 100 ÷ yield %.
  2. Compute maintainable EPS in one line: equity profit ÷ number of shares.
  3. Multiply EPS by P/E.
  4. Cross-check with the dividend method only if a dividend rate is given.
  5. Check that the answer is not absurd against paid-up value, for example ₹400 on a ₹10 share with a 10% dividend.

Common mistakes in Yield and Earnings-Based Methods

  • Using total profit instead of profit after preference dividend

    Students forget that preference shareholders rank first for dividends.

    Fix: Always deduct the preference dividend and tax before computing equity profit.

  • Including non-recurring or abnormal items in maintainable profit

    The profit figures look ready to average.

    Fix: Read every note on profits. Remove one-off gains and losses, and adjust for stated future changes.

  • Applying the dividend rate to market value or number of shares instead of paid-up value

    The dividend rate is a percentage, and the base is unclear.

    Fix: Dividend rate is on paid-up value. Value = (expected rate ÷ normal rate) × paid-up value.

  • Mixing up earnings yield and P/E

    Both are given in one question and look similar.

    Fix: P/E = 100 ÷ earnings yield %. A higher yield means a lower P/E.

  • Using the dividend yield method for a controlling stake

    Dividend rates are easy to compute.

    Fix: For a controlling stake, profits are the relevant measure. Use earnings yield or P/E and say why.

Worked examples

Example 1

A Ltd has 2,00,000 equity shares of ₹10 each fully paid. It is expected to pay a dividend of 15%. The normal return on similar companies is 12%. Value one share by the dividend yield method.

Show the solution
  1. Expected dividend rate = 15%.
  2. Normal rate of return = 12%.
  3. Value per share = (15 ÷ 12) × ₹10.
  4. = 1.25 × ₹10 = ₹12.50.

Answer: Value per share = ₹12.50.

Example 2

B Ltd has 50,000 equity shares of ₹10 each and 10% preference shares of ₹5,00,000. Profits after tax for three years were ₹4,50,000, ₹5,00,000 and ₹5,50,000, including a non-recurring gain of ₹30,000 after tax in year 2. Normal earnings yield is 12.5%. Value one share by the earnings method and by P/E.

Show the solution
  1. Adjust year 2 profit: ₹5,00,000 − ₹30,000 = ₹4,70,000.
  2. Average profit = (₹4,50,000 + ₹4,70,000 + ₹5,50,000) ÷ 3 = ₹14,70,000 ÷ 3 = ₹4,90,000.
  3. Preference dividend = 10% × ₹5,00,000 = ₹50,000.
  4. Maintainable profit for equity = ₹4,90,000 − ₹50,000 = ₹4,40,000.
  5. Value of equity = ₹4,40,000 ÷ 0.125 = ₹35,20,000.
  6. Value per share = ₹35,20,000 ÷ 50,000 = ₹70.40.
  7. Check with P/E: EPS = ₹4,40,000 ÷ 50,000 = ₹8.80; P/E = 100 ÷ 12.5 = 8; value = 8.80 × 8 = ₹70.40.

Answer: Value per share = ₹70.40 by both methods.

Exam tips

  • State the method choice and why: dividend yield for minority, earnings for controlling stake. A line of reasoning earns marks even when the numbers differ.
  • Show the maintainable profit working in a clear table of adjustments. Marks are given for each adjustment.
  • If a comparable company's P/E is given, apply it to your EPS and mention the comparability assumption.
  • Check whether the question gives tax. If so, deduct it before computing yield-based value.
  • In MCQs, convert the yield to P/E quickly and compare with the options.

Practice questions from Valuation of Shares (including Determination of Goodwill)

Yield and Earnings-Based Methods in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Yield and Earnings-Based Methods: frequently asked questions

What is the difference between dividend yield and earnings yield method?

The dividend yield method uses the dividend the company is expected to pay, and suits a minority holder. The earnings yield method uses the profit available to equity shareholders, whether distributed or not, and suits a controlling holder.

How do I calculate maintainable profit for share valuation?

Take past profits, remove non-recurring items, adjust for known future changes, deduct tax, and average them. Then deduct preference dividend. The result is the profit available to equity shareholders.

How is P/E related to earnings yield?

P/E equals 100 divided by the earnings yield in percent. A 12.5% yield gives a P/E of 8. Both methods give the same value if used with consistent figures.

Do these methods follow Ind AS 113?

No, these are share valuation techniques used in exam questions. Ind AS 113 is the fair value standard and states that fair value is a market-based measurement using the assumptions market participants would use.