Firms with low P/E ratios tend to have current residual income that is greater than:
A) future actual income.
B) future residual income.
C) past actual income.
D) past residual income.

Question

Quizplus · Accepted Answer

Low P/E ratio indicates that the market does not have high expectations for the firm's future earnings. Therefore, future residual income (earnings exceeding the required return on equity) is likely to be lower than the current residual income. Past actual and residual income are not relevant to the current value of the firm.

Firms with Low P/E Ratios Tend to Have Current Residual