Page 538 - FM Integrated WorkBook STUDENT 2018-19
P. 538
Chapter 21
Question 3
Earnings yield valuation
Company J has earnings of $1.2 million. A similar listed company has an
earnings yield of 11%. J’s earnings have been growing at a rate of 2% per
annum but it is unknown as to whether this will continue.
Estimate the value of J Co in the situation of no growth in earnings and of
growth maintained at 2% per annum.
Without growth, value = earnings × 1/earnings yield
Value = $1.2m × 1/0.11 = $10.9 million
With 2% growth, value = (earnings × (1 + growth))/(earnings yield – growth)
Value = ($1.2m × 1.02)/(0.11 – 0.02) = $13.6 million
528
