To Ridge,
Yes you are right, we should use EPS%. We should also factor in EPS growth and risk premiums, but I want to keep the example simple.
To Juz,
Sorry, I don't get it. Please help me understand.
Let's use a simple example. Assume SAFESTOCK (STK) has a dividend of $1 a share. The EPS growth rate is zero and the earnings are 100% safe, so the stock yield is perfectly correlated with interest rates. The stock trades at $10 a share giving a yield of 10%. Interest rates are also 10%.
Suddenly interest rates drop to 5%. What price would STK be?
a. $20 (= STK yield of 5%)
b. $5 (= STK yield of 20%)
The correct answer is (a). Your posting implies the answer is (b). Please clarify things. What is the correct answer in your opinion?
To Ridge,Yes you are right, we should use EPS%. We should also...
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