The Yardeni Model estimates equilibrium earnings yield. E1/P0= Yb-d(LTEG) Where: Yb typically is single A rated bonds (to approximate equity risk premium) Yb-d(LTEG)= “Yardeni Earnings Yield” CFAI IMHO would not ask a basic memorization question on this. So to use this bad boy, you compare the earnings yield from this model to the current market earnings yield. If the current market yield is higher, equities are underpriced. Where they can get you is when they give you the P/E multiple and expect you to remember that the inverse of the P/E multiple is the earnings yield E/P.
Also keep in mind that if they give you a current E/P, they may ask for a justified P/E ratio in which you’ll need to use expected forward earnings rather than current.
justified P/E means using FORWARD earnings. yes sir. i might have been able to dig that out of my memory, but will now for sure thanks to you. good point!
IMO, where they would get you on this model would be the calculation of “d”. Since “d” is based on the reliance/quality fo the LTEG, I can see them being sneaky about what it is. IE: Saying something along the lines of, while we currently have faith in our earnings estimates for the current quarter, GOING FORWARD, we have little faith in our estimates due to changing… My 2 cents.
jdane416 Wrote: ------------------------------------------------------- > IMO, where they would get you on this model would > be the calculation of “d”. Since “d” is based on > the reliance/quality fo the LTEG, I can see them > being sneaky about what it is. > > IE: Saying something along the lines of, while we > currently have faith in our earnings estimates for > the current quarter, GOING FORWARD, we have little > faith in our estimates due to changing… > > My 2 cents. Or they may not give us d, so we have to use whatever the typical value for d is, which I believe is .10.
Or they might ask you to give the price for the market that the model implies.
"CFAI IMHO would not ask a basic memorization question on this. So to use this bad boy, you compare the earnings yield from this model to the current market earnings yield. If the current market yield is higher, equities are underpriced. " Could you briefly explain why equities would be under priced? If the model says earnings yield should be 2% and in the market it is 4%…then…? sorry i have a knot in my head.
Remember this is all FORWARD P/E or forward earnings yield. If model says fwd earnings yield should be 2% and market’s observable forward earnings yield is 4, then (fwd Earnings / current price) in the market right now is too LOW…underpriced…buy it.
"CFAI IMHO would not ask a basic memorization question on this. So to use this bad boy, you compare the earnings yield from this model to the current market earnings yield. If the current market yield is higher, equities are underpriced. " Could you briefly explain why equities would be under priced? If the model says earnings yield should be 2% and in the market it is 4%…then…? sorry i have a knot in my head.
yellayella Wrote: ------------------------------------------------------- > "CFAI IMHO would not ask a basic memorization > question on this. So to use this bad boy, you > compare the earnings yield from this model to the > current market earnings yield. If the current > market yield is higher, equities are underpriced. > " > > Could you briefly explain why equities would be > under priced? > If the model says earnings yield should be 2% and > in the market it is 4%…then…? > sorry i have a knot in my head. Think of bond pricing. Higher yield means lower price. If the yield is higher than what it should be, then its underpriced.