Reading 43: Market-Based Valuation: Price Multiples- LOS justify, valuation, common

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LOS e: Explain and justify the use of earnings yield (E/P).

Q1. A common pitfall in interpreting earnings yields in valuation is:

A)   look-ahead bias.

B)   using underlying earnings.

C)   using negative earnings.

 

Q2. A common justification for using earnings yields in valuation is that:

A)   earnings are more stable than dividends.

B)   negative earnings render P/E ratios meaningless and prices are never negative.

C)   earnings are usually greater than free cash flows.

 

Q3. The observation that negative price to earnings (P/E) ratios are meaningless and prices are never negative is used to justify which valuation approach?

A)   Earnings yield.

B)   Dividend discount model.

C)   Dividend yield.