Which one of these factors generally has the greatest impact on a firm's PE ratio?
A)Required rate of return
B)Current dividends
C)Future opportunities
D)The overall risk level of the current firm
E)Depreciation method used by the firm

Question

Quizplus · Accepted Answer

The future opportunities of a firm generally have the greatest impact on its PE ratio. This is because the PE ratio is based on the growth potential and expected future earnings of the firm. Firms with strong growth potential and promising future opportunities are usually valued higher and therefore have a higher PE ratio. Conversely, firms with limited opportunities for growth or facing negative market trends generally have a lower PE ratio. The other factors listed may also impact a firm's PE ratio, but not to the same extent as future opportunities.

Which One of These Factors Generally Has the Greatest Impact