Which of the Following Is a Problem That Exists When

question 26

Multiple Choice

Which of the following is a problem that exists when using an industry median P/E ratio instead of an industry mean P/E ratio when trying to avoid the 1/X problem?

• A)The P/E ratios of larger firms will have a greater effect on the median P/E than the P/E ratios of smaller firms.
• B)It ignores the P/E ratios of all firms above or below those of the median firm.
• C)One firm with negative earnings can skew the results such that the P/E ratio is not meaningful.
• D)The P/E ratio should use only firms of similar size to the firm being valued, and the median P/E uses the P/Es of all firms in the industry.

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