Hi everyone, I think there must be a simple explanation here but its just something I’m not understanding regarding the Yardeni model.
On the Schweser formula sheets, the formals is written as E1/P0 - [Yb - d(LTEG)] > 0 means the market is undervalued. But I come across questions in my practice that require calculating a justified P/E using the Yardeni model and the answers use just the second part of the formula , [Yb - d(LTEG)] and then compare it to 1/ (E1/P0). I understand if you are asked for P/E you need the inverse of E/P but I don’t understand why they don’t use the whole equation. Can anyone help me on this? I’d be so grateful.
It seems like some questions want you to use E1/P0 - [Yb - d(LTEG)]
And some want you to use E1/P0 = [Yb - d(LTEG)] and I don’t know how to recognise what the question is asking for!
Thanks!
It’s just two ways of evaluating the same thing, and both lead to the same answer.
Keep it simple. If the Market forward earnings yield (E1/P0) is > the Justified earnings yield (Yardeni calculation), then the market is undervalued. If not, then the market is overvalued.
You can also hit the 1/x key on your calculator and compare them as P/E ratios. The higher earnings yield will have a lower P/E ratio, leading to the same conclusion.
Thank so much for this JayWill, does that mean the formula should be E1/Po compared to [Yb - d(LTEG)] rather than E1/Po - [Yb - d(LTEG)]?
So, what you want to calculate is the [Yb - d(LTEG)] part. E1/P0 will likely be given. The point of E1/P0 - [Yb - d(LTEG)] is to do the under/overvalued evaluation.
If E1/P0 - [Yb - d(LTEG)] results in a positive number (read > 0), the market earnings yield is clearly higher than the Yardeni yield, thus the market is undervalued. You could also look at it as a ratio. E1/P0 / [Yb - d(LTEG)]. If the resulting ratio is > 1, again, the market earnings yield (numerator) is higher than the Yardeni yield (denominator) thus the market is undervalued.
You have completely cleared this up for me! Really thank you, you’re a star! I was busy working out E1/Po - [Yb - d(LTEG)] and then comparing it to the E1/Po again!! So silly but it just wasn’t clicking! Thanks again and good luck in 13 days! 
You bet. Good luck to you as well!