Which of the following will affect observed price-to-earnings ratio (lagged ratio):

I. Quality of earnings
II. Business risk
III. Risk free rate of interest
IV. Expected growth

A)I, II, III, and IV
B)II, III, and IV
C)II and IV
D)I, II, and IV

Question

Which of the following will affect observed price-to-earnings ratio (lagged ratio):

I. Quality of earnings
II. Business risk
III. Risk free rate of interest
IV. Expected growth

A)I, II, III, and IV
B)II, III, and IV
C)II and IV
D)I, II, and IV

Quizplus · Accepted Answer

The observed price-to-earnings (P/E) ratio can be influenced by a variety of factors including the quality of earnings (which affects investor perception and trust in the reported earnings), business risk (which can affect future earnings potential and thus investor willingness to pay for current earnings), the risk-free rate of interest (as it affects the discount rate used in valuation models, thereby influencing the price investors are willing to pay for a given level of earnings), and expected growth (since higher expected growth in earnings can lead to a higher price, all else being equal, thus increasing the P/E ratio).

Which of the Following Will Affect Observed Price-To-Earnings Ratio (Lagged