Which of the following is a problem that exists when using the aggregate value of comparable firms and dividing by the aggregate earnings in order to determine a comparable P/E ratio?

Question

Quizplus · Accepted Answer

The P/E ratios of larger firms will have a greater effect on the average P/E than the P/E ratios of smaller firms. This is because the aggregate value of larger firms will dominate the aggregate value of smaller firms, leading to a larger weight on the P/E of larger firms. This can skew the results and make the comparable P/E ratio less meaningful. Using the aggregate value of comparable firms and dividing by the aggregate earnings can lead to larger firms having a greater effect on the P/E ratio, which may not accurately reflect the valuation of a smaller firm. Additionally, other factors such as differences in growth rate, debt levels, and industry dynamics could also impact the accuracy of using a comparable P/E ratio.

Which of the Following Is a Problem That Exists When