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The Price/earnings Ratio Is the Ratio of the Earnings Per

question 21

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The price/earnings ratio is the ratio of the earnings per share of common stock to the market price of a share of the common stock.


Definitions:

Market Risk Premium

The additional return expected by an investor for holding a risky market portfolio instead of risk-free assets.

Risk-Free Rate

The hypothetical yield on a risk-free investment, often exemplified by state-issued bonds.

Cost Of Equity

The return that a company must offer investors to compensate for the risk of investing in its shares.

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