In relation to the cost of equity, how is the earnings yield calculated from a P/E ratio?

The earnings yield is a measure of the earnings generated per share relative to the price of the stock, and it can indeed be derived from the price-to-earnings (P/E) ratio. The P/E ratio itself is defined as the price of the stock divided by the earnings per share (EPS). To find the earnings yield, you would take the reciprocal of the P/E ratio.

By taking 1 divided by the P/E ratio, you effectively express how much earnings an investor is getting for each dollar invested in the stock. This calculation makes it easier to compare the earnings yield to other investment returns and helps investors assess the attractiveness of a stock based on its earnings performance.

Other options presented do not correctly represent the relationship needed to derive the earnings yield from the P/E ratio. For example, dividing the P/E ratio by earnings would not provide a meaningful financial metric relevant to the cost of equity. Similarly, multiplying the P/E ratio by price per share or calculating net income divided by total equity would not yield the earnings yield or is irrelevant in this context. Thus, the calculation of 1 divided by the P/E ratio is the correct method to determine the earnings yield.