Asked by Jasleen Sekhon on Jun 15, 2024
Verified
The reciprocal of the risk-adjusted equity cost of capital used is the
A) return on assets.
B) return on common equity.
C) price earnings ratio.
D) profit margin on sales.
Risk-adjusted Equity Cost
A method of determining the cost of equity capital that incorporates the risk associated with the equity investment.
Price Earnings Ratio
A valuation metric that compares a company's share price to its per-share earnings, used to evaluate if a stock is over or under-valued.
- Absorb the rudimentary principles of evaluating businesses and the impact of cash flows.
Verified Answer
KH
Kirti HoodaJun 18, 2024
Final Answer :
C
Explanation :
The reciprocal of the risk-adjusted equity cost of capital is essentially the price earnings ratio. This is because the price earnings ratio is calculated by dividing the market value per share by the earnings per share, which can be seen as the inverse of the equity cost of capital when adjusted for risk. This ratio reflects how much investors are willing to pay per dollar of earnings, which inversely relates to the cost of equity capital for the company.
Learning Objectives
- Absorb the rudimentary principles of evaluating businesses and the impact of cash flows.
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