ABC Corporation and DEF Corporation Operate in the Same Industry

question 60

Multiple Choice

ABC Corporation and DEF Corporation operate in the same industry. ABC has a P/E ratio that is 50% higher than DEF Corporation. Which of the following account for some of the difference in the observed P/E ratios?
I. ABC uses more conservative accounting principles
II. ABC has a higher cost of equity capital
III. ABC has higher expected future growth
IV. DEF uses FIFO and ABC uses LIFO

• A) I, II, III and IV
• B) I, III and IV
• C) I and III
• D) II, III and IV

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Definitions:

Market Economy

An economic system where decisions regarding investment, production, and distribution are based on supply and demand, with minimal governmental intervention.

Distribution of Output

The way total production is spread across different agents or locations in the economy.

Consumer Needs

Fundamental requirements that motivate consumer behaviors and decisions in the marketplace.

Production Costs

The total expenses incurred in the manufacturing or production of goods, including raw materials, labor, and overhead costs.