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ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers

Orrin Ltd has a share price of $6.00 and earnings per share of $0.40. What is its earnings yield, and what does it imply?

Earnings yield is earnings per share divided by share price: $0.40 divided by $6.00 equals 6.7%. It is the reciprocal of the P/E ratio of 15. It is not a dividend measure, and it should not be inverted incorrectly into 15%.

  1. A6.7%, which is the inverse of a P/E ratio of 15Correct
  2. B15.0%, which is the inverse of a P/E ratio of 6.7
  3. C6.7%, which is the P/E ratio expressed as a percentage of dividends
  4. D15.0%, which is the dividend yield on the shares

Explanation

P/E = 6.00/0.40 = 15. Earnings yield = EPS/price = 0.40/6.00 = 6.67%, the reciprocal of the P/E. Option B reverses the two figures; the other options confuse earnings yield with dividend measures.

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