Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Question

Want to see more full solutions like this?

Answer 1

Textbook Question

Chapter 2, Problem 1DQ

Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

In the context of financial markets, liquidity refers to:A) The amount of cash a company holdsB) The ease of converting assets into cash without affecting their priceC) The profitability of a companyD) The risk associated with an investment need help!

Don't use ai In the context of financial markets, liquidity refers to:A) The amount of cash a company holdsB) The ease of converting assets into cash without affecting their priceC) The profitability of a companyD) The risk associated with an investment

I need help!! Which of the following is a characteristic of common stock?A) Fixed dividendsB) Voting rightsC) Priority in liquidationD) Guaranteed return on investment

Answer 2

Textbook Question

Chapter 2, Problem 1DQ

Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 2, Problem 1DQ

Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 2, Problem 1DQ

Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Answer 8

Expert Solution & Answer

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To Explain: The financial variables that affect the the price/earnings ratio.

Introduction:

Price/Earnings ratio:

The price/earnings ratio is a way of valuing a company's shares and provides information about the share price being overvalued or undervalued.

Answer 12

Answer to Problem 1DQ

Factors like earnings growth rate, company's share price, and quality of management affect the price/earnings ratio.

Answer 13

Explanation of Solution

The first factor is the earnings growth rate. An increase in the earnings of the firm with the share price being constant means that the share price of the company is undervalued.

Similarly, the second factor, which is the company's share price, affects the ratio as well. An increase in the share price of the company with the earnings being constant means that the share price of the firm is overvalued.

The third factor is the quality of management. It affects the ratio because the way the management works and is able to generate sales and earnings are important, and hence, it plays a crucial role in determining the ratio.

Answer 14

Conclusion

The main purpose of the price/earnings ratio is to provide information about the stability of the business operations of a firm in order to enable comparison with its peers, work upon its limitations, and consequently, make the required changes.

Answer 15

Ch. 2 - Discuss some financial variables that affect the...Ch. 2 - What is the difference between book value per...Ch. 2 - Explain how depreciation generates actual cash...Ch. 2 - What is the difference between accumulated...Ch. 2 - How is the income statement related to the balance...Ch. 2 - Prob. 6DQ Ch. 2 - Explain why the statement of cash flows provides...Ch. 2 - What are the three primary sections of the...Ch. 2 - Prob. 9DQ Ch. 2 - Why is interest expense said to cost the firm...

Discuss some financial variables that affect the price-earnings ratio. (LO2-2)

Videos

Answer to Problem 1DQ

Explanation of Solution

Want to see more full solutions like this?

Chapter 2 Solutions