Variables with Inverse Relationship to P/E Ratio:

Inverse Relationship of P/E Ratio with Various Variables

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Question

Which of the following variables has/have an inverse relationship with the P/E ratio?

Answers

Explanations

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A. B. C. D.

B

One can remember the formula P/E = (D/E)/(k - g); and note that k, which is the required rate of return, is in the denominator, i.e. inverse relationship. Or one can remember that a high P/E ratio means paying a high price for some earnings, i.e. the rate of return required is low.

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