Question

1. T/F The PE ratio is the most widely used stock multiple

2. . T/F The market(S&P 500) has a PE ratio of 20 and a price of 3000, which means the earnings for the market are 60k

3. T/F Amazon has a very high PE relative to the market most likely because their earnings are slowing down.

Answer 1

1. The answer is true.

Stock multiples are the indicators that are used in valuation of a firm stock. PE ratio is one of the widely used ratio to analyse the performance of the stock. It is used as a stock multiple to analyse the over valuation and undervaluation of a firm's stock.

A high PE ratio means the price of the share is relatively high compared to the earnings of the firm and vice versa.

2. The answer is false.

PE ratio = Price per share / Earnings per share

here,

PE ratio = 20 and price = 3000

therefore,

20 = 3000 / earnings

Earnings per share = 3000 / 2 = 1500

hence the answer is false.

3.The answer is true.

A firm will have high PE ratio either if the price of the share is high or the earnings are low compared to the price.

If the company earnings are slowing down and the price remains more or less the same, the PE ratio will rise.

Hope it explains!