How each of the following fundamental factors could affect company’s P/E?
||Effect on P/E
|The risk (beta) increases
||P/E is decreasing function of risk, so that as risk increases, P/E will decrease.
|The estimated growth rate increases
||P/E is increasing function of the growth rate, so if the company is expected to grow, the P/E will grow accordingly.
|The equity risk premium increases
||P/E is decreasing function of equity risk premium, so that once the risk is rising, P/E will drop.
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