The spread between k and g is the primary determinant of the size of the ________.
Click on the arrows to vote for the correct answer
A. B. C. D.D
The spread between k and g is the primary determinant of the size of the P/E.
The spread between k and g refers to the difference between the required rate of return on an investment (k) and the expected growth rate (g) of that investment. This spread is a key factor in determining the size of the price-earnings ratio (P/E) for a company.
The P/E ratio is a valuation metric commonly used in financial analysis to assess the relative value of a company's stock. It is calculated by dividing the market price per share by the earnings per share (EPS). The P/E ratio reflects the market's expectations of a company's future earnings growth.
The spread between k and g directly affects the P/E ratio. When the spread is wider, meaning the required rate of return (k) is significantly higher than the expected growth rate (g), the P/E ratio tends to be lower. This suggests that investors have a higher discount rate for the company's future earnings and are willing to pay less for each unit of earnings.
Conversely, when the spread between k and g is narrower, indicating a smaller difference between the required rate of return and the expected growth rate, the P/E ratio tends to be higher. This suggests that investors have a lower discount rate for the company's future earnings and are willing to pay more for each unit of earnings.
Therefore, the spread between k and g primarily determines the size of the P/E ratio. Option D, P/E, is the correct answer to this question.