- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 23. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 2. Price to Earnings: Determining Earnings
CFA Practice Question
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.
Correct Answer: III
Since earnings is one of the components of the E/P ratio, a negative earnings would also imply that earnings yield is negative.
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. |