The price/earnings ratio would be expected to increase as the cost of equity capital increases, all other things equal.

Question

Quizplus · Accepted Answer

The price/earnings ratio (P/E ratio) is calculated by dividing the market price of a stock by its earnings per share (EPS). The cost of equity capital refers to the return required by the investors for their investment in equity shares. If the cost of equity capital increases, it means that the investors require a higher return on their investment. This would result in a decrease in the P/E ratio, all other things equal, as investors would be willing to pay less for a given level of earnings. Hence, the statement is false.

The Price/earnings Ratio Would Be Expected to Increase as the Cost