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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Definitions:

Worksheet

A paper or digital document used to organize data and perform calculations, often preliminary to the preparation of financial statements.

Ledger

A group of accounts that records data from business transactions.

Withdrawals Account

An account used to track the money that an owner takes out of the business for personal use, also known as draws.

Capital Account

A financial statement that shows the changes in a company's equity, including contributions by and distributions to owners over a period.