Please respond to the following questions with informative information. 1. You can’t eat an accrualKevin and Sarah, thanks for joining in so far by tackling this topic.Class, I once had a boss that said “you can’t eat an accrual.” What do you think this means?2. A price-to-earnings ratio is the ratio of the market price per share to annual earnings per share for a company’s stock (CFI, 2020, para. 1). It is a very important component in a company that has stocks because it measures the payback period for your investment in years. Three economic factors that will drive a firm’s price-earnings ratio in a given period to be higher than that of other firms in the same industry would be 1. Positive future performance, 2. Investors that are willing to pay more for their earnings and 3. Investors with higher expectations. Three factors that will drive a firm’s price-earnings ratio to go down in a given period or decrease over time are 1. Fierce competition, 2. Diminishing growth, 3. Increased systematic risk. (CFI, 2020, para. 4-5).ReferenceCFI. (2020). Price Earnings Ratio – Formula, Examples and Guide to P/E Ratio. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/price-earnings-ratio3. Re: Topic 8 DQ 1Investor perspectives, general market rapid change, and cost of debt are three economic factors affecting price earnings ratio (Harder, 2018). As companies reinvest earnings, buying factories and expanding, investors see this as expected future growth and are willing to pay higher prices for shares (Harder, 2018). When interest rates fluctuate, demand for dividend paying stocks mirror that fluctuation and influence what price the investors will pay for cash dividends (Harder, 2018). Investors will consider the higher cost to the firm of debt may have a bad influence on future earnings and this would cause share prices to decline (Harder, 2018). Historical earning for the last 12 months is a safer approach to price earning ratio (McLachlan, 2015). A more relevant approach is to forecast the forward 12 months, including the forecast risk factored in (McLachlan, 2018). ReferenceHarder, D. (2018, Nov.17). What factors might influence a firm’s price earning ratio? Retrieved from https://pocketsense.com/factors-firms-price-earnings-ratio-8788295.htmlMcLachlan, K. [JustOneLap]. (2015, Jul. 11). Valuations: Price earnings (PE) model. [Video file]. Retrieved from https://www.youtube.com/watch?v=iLYa9WIQ85k
