Various economic factors that drive the price-earnings ratio of an organization higher are inflation, low taxation, and higher rates of exchange. It is because close analysis indicates that when the taxation rate is low, it is possible that the company will have more revenue and thus increasing the price-earnings ratio. On the other hand, lower price earnings of n organization can be seen when there is a low policy applied to the company and thus end up violating the rules that may cause it to pay more money for compensation. Also, low demand is another factor that can lower the earnings. The last factor is the high government involvement activities that makes the company to lower the various operations that they do for government to perform.

One accounting factor affecting the earning is the capital market whereby higher earnings are achieved when the capital market is wide. Also, better reporting system can increasing price-earnings as correct values are outlined. The last accounting factor increasing the earning is the kind of the business entity as when a business is big; there are high sources of income. On the other hand the inflation rate is another factor that caused lower price- earnings to a business. Also, political factors are other issues affecting the price-earning.

The theory is a method of valuation of an equity whose concept is based on the fact that the value of stock of a company sis equivalent to the current value of the future income on residue that is discounted at a fair equity cost. It is relevant to the shareholders in that it utilizes the metrics of the book value that is common to the equity of the shareholder as well as the future expectations of income value. Usually, the starting point of appropriate value of company is the value on the book because it is a reflection of the claims of the shareholders on the common equity to the net assets of a firm as it is shown in the balance sheet.

Therefore, in the residual income valuation, the role of book value is evident in that it applies the book of value on the equity of the shareholder and the future income expected to value the firm and understand whether the firm is making any profit or losses. Also, it is used in reflecting the shareholder’s claims that they make and they are reflected in the balance sheets. Therefore, it is clear that the firm is valued by using the residual income valuation method.