To estimate the expected earnings multiplier, it is necessary to estimate changes in the ________.
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A. B. C. D.B
To estimate the expected earnings multiplier, it is necessary to estimate changes in the required rate of return, the expected growth rate of dividends (earnings)
(g) and the spread between k and g.
To estimate the expected earnings multiplier, it is necessary to estimate changes in the required rate of return.
The earnings multiplier, also known as the price-to-earnings (P/E) ratio, is a valuation metric used to assess the relative value of a company's stock. It is calculated by dividing the market price per share by the company's earnings per share (EPS).
The required rate of return is an important component in determining the P/E ratio because it reflects investors' expectations and their willingness to pay for a company's earnings. It represents the minimum rate of return that investors expect to earn from an investment, considering the level of risk associated with the investment.
Changes in the required rate of return can have a significant impact on the P/E ratio. When the required rate of return increases, it indicates that investors demand a higher return for the same level of risk, which could result from various factors such as changes in interest rates, market conditions, or investor sentiment. As a result, a higher required rate of return tends to lower the P/E ratio, indicating that investors are willing to pay less for each dollar of earnings generated by the company.
Conversely, when the required rate of return decreases, it suggests that investors are more willing to accept a lower return for the same level of risk. This tends to increase the P/E ratio, indicating that investors are willing to pay more for each dollar of earnings.
The other options provided in the answer choices (unit labor cost, relative strength of foreign competition, and capacity utilization rate) are not directly related to estimating the expected earnings multiplier. Although these factors may have an indirect influence on a company's earnings or market conditions, they are not specifically used in estimating changes in the required rate of return, which is the key determinant of the earnings multiplier.