Which of the following causes price-earnings ratios to differ between two firms at any time?

Question

Quizplus · Accepted Answer

Differences in idiosyncratic risk and earnings growth prospects can cause price-earnings ratios to differ between two firms. Idiosyncratic risk affects the discount rate applied to a firm's earnings, and earnings growth prospects influence future earnings expectations, both of which are key components in calculating the P/E ratio. Differences in risk-free rates generally affect all firms in the market similarly, so they are less likely to cause differences in P/E ratios between two specific firms.

Which of the Following Causes Price-Earnings Ratios to Differ Between