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:

Outstanding Checks

Checks that have been written and recorded in the accounting books but have not yet been cashed or cleared by the bank.

Month-end Bank Statement

A document provided by a bank summarizing the account’s activity and balances over the last month, used for reconciling the bank account.

Erroneously Charged

Refers to a financial transaction or fee that has been incorrectly applied to an account.

Outstanding Checks

Checks issued by a company that have not yet been cashed or cleared by the bank, considered in reconciling the bank statement.