Question

The PE ratio is useful because it measures: A. how much a stock is expected to...

The PE ratio is useful because it measures:

A.

how much a stock is expected to earn.
B.

how much an investor is willing to pay for $1 of earnings.
C.

how much earnings are going to grow.
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Answer #1

Option B is correct

The PE ratio is useful because it measures how much an investor is willing to pay for $1 of earnings.

PE = Price per share/Earnings per share

Option A is incorrect because the stock expected to earn is measured by estimating the future price of the stock and then calculating the rate required to achieve that price. That rate is called the expected rate of return

Option C is incorrect because the growth in earnings are measured by ROE multiplied by retention ratio

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