Which of the Following Is a Problem That Exists When

question 18

Multiple Choice

Which of the following is a problem that exists when using the aggregate value of comparable firms and dividing by the aggregate earnings in order to determine a comparable P/E ratio?

• A)One firm with negative earnings can skew the results such that the P/E ratio is not meaningful.
• B)The P/E ratios of larger firms will have a greater effect on the average P/E than the P/E ratios of smaller firms.
• C)The P/E ratio should use only firms of similar size to the firm being valued, and this method uses the prices and the earnings of all the firms in the industry.
• D)The aggregate value of comparable firms is not a good substitute for prices.

---

Definitions:

Profit-Maximizing Quantity

The output level at which a firm achieves the maximum possible profit, considering its cost structure and market demand.

Power Cords

Electrical cables that deliver power from an outlet or source to an electronic device or appliance.

Market Wage Rate

The prevailing rate of pay for work in a particular labor market or industry.

Profit-Maximizing Quantity

The level of output at which a firm achieves the highest possible profit, determined by the point where marginal cost equals marginal revenue.