Which of the Following Is True About the P/E Ratio

question 25

Multiple Choice

Which of the following is true about the P/E ratio of a firm?

• A) The higher the P/E ratio, the less investors are willing to pay for each dollar earned by the firm.
• B) If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment.
• C) The appropriate value of P/E ratio is multiplied with EPS to estimate the stock price.
• D) If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value.
• E) If the firm's P/E ratio is too low relative to that of similar firms, it means that the market has overvalued its current earnings.

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Definitions:

Dependent Variable

In an experiment or study, it is the variable that is being tested and measured, expected to change in response to the independent variable.

Independent Variable

A variable in an experiment or model that is manipulated or changed to observe its effect on a dependent variable.

Significance

The likelihood that an observed difference or relationship in data did not occur by chance, often measured through statistical tests.

Regression

A statistical method used to examine the relationship between a dependent variable and one or more independent variables.