In its simplest form, the PE ratio valuation method: cannot be used to value a d
ID: 2743023 • Letter: I
Question
In its simplest form, the PE ratio valuation method:
cannot be used to value a dividend paying firm.
will over-estimate the PE ratio of a dividend paying firm versus a non-dividend paying firm.
will not be affected by the payout ratio differences among firms.
will under-estimate the PE ratio of a dividend paying firm versus a non-dividend paying firm.
cannot be used to value a dividend paying firm.
will over-estimate the PE ratio of a dividend paying firm versus a non-dividend paying firm.
will not be affected by the payout ratio differences among firms.
will under-estimate the PE ratio of a dividend paying firm versus a non-dividend paying firm.
Explanation / Answer
P/E ratio is calculated by using Market price of stock and Earning per share of the company. P/E ratio is used for valuation of company stock. P/E ratio denotes for one dollar of earnings, how much an investor willing to pay. So the valuation method shows the investor confidence on the company stock.
IN P/E method of valuation dividend payment does not play any role. Either company pay dividend or not that valuation does not affect. Earning is important factor in P/E valuation.
Hence, option (C) is correct answer.
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