Question

25.       Which of the following is true regarding the price/earnings ratio?

            A)        A high P/E ratio is often taken to mean the firm has poor prospects for future growth.

            B)        A P/E ratio of 15 means investors are willing to pay $1 for each $15 of past earnings.

            C)        Low P/E ratios can only result from a firm having very low earnings.

            D)        If a firm has high earnings per share, then it will have a very high P/E ratio.

E) NONE OF THE ABOVE IS TRUE

Answer 1

Answer:- Option (E) None of the above

Explanation:-

Option (A) is not True:- Reason- A high P/E ratio is often taken to mean that a firm is expected to grow significantly

Option (B) is not True:- Reason- A P/E ratio of 15 means investors are willing to pay $15 for each $1 of past earnings.

Option (C) is not True:- Reason- Low P/E ratios can also result from low market price of the stock.

Option (D) is not True:- Reason- If a firm has high earnings per share, then it is not correct that it will have very high P/E Ratio as high earnings will result in reducing the P/E Ratio because it earning per share comes in denominator.