Company X Has a P/E Ratio of 16 in Year

question 102

Multiple Choice

Company X has a P/E ratio of 16 in year 2013 and 16.5 in 2014.In 2015,its P/E ratio is 24.The best way to interpret these data is to conclude that:

• A) the stock is overpriced and should be sold.
• B) the stock has great growth capacity and should be bought.
• C) other financial results and news should be examined to determine the cause of the P/E ratio change.
• D) the stock is underpriced and should be bought.

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Definitions:

Scale

The size or level of activity of a company or operation, or the capacity to adjust the size or level of activity.

Increasing Returns

A condition in economics when an increase in the scale of production leads to a greater proportional increase in output.

Isoquants

Curves that represent combinations of inputs that produce the same level of output, used in production theory.

Output

Output refers to the quantity of goods or services produced by a firm, industry, or economy within a certain period.