Final answer:
In an improving economic environment, a company is expected to trade at a higher multiple of FY1 earnings compared to LTM earnings and a lower multiple of LTM earnings compared to FY2 earnings, making (C) I and IV the correct answer.
Step-by-step explanation:
In an improving economic environment, one would expect a company to trade at: (I) a higher multiple of FY1 (Forward Year 1) earnings than LTM (Last Twelve Months) earnings, because the future earnings are expected to reflect improved economic conditions. Similarly, one would expect a company to trade at: (IV) a lower multiple of LTM earnings than FY2 (Forward Year 2) earnings, because the earnings in the second forward year are anticipated to be even better as the economy continues to improve. Thus, the correct answer to this question is (C) I and IV.
Expectations are crucial in determining company value; if a company is anticipated to see increased profits, its stock valuation will increase due to investor optimism. Conversely, if current interest rates are lower than the rates at which loans were made, those loans become more valuable because they yield a return above the prevailing market rates.
In the long run, if a monopolistically competitive firm earns positive economic profits, this will attract new entrants or cause existing firms to adjust, leading to a reduction in the original firm's profit, thereby impacting the original firm's profit-maximizing price and output levels.