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.

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Definitions:

Thyroid Gland

An endocrine gland in the neck that produces hormones regulating growth, metabolism, and energy levels.

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Data obtained from the environment through the senses, such as sight, hearing, smell, taste, and touch.

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A form of signal used in electrical systems that represents data through variations in voltage, current, or frequency.

Neuron

A nerve cell that is the basic building block of the nervous system, responsible for transmitting information.