Which of the Following Statements About the Price/Earnings Ratio Is

question 155

Multiple Choice

Which of the following statements about the Price/Earnings ratio is not correct?

• A)The Price/Earnings ratio indicates how much investors are willing to pay for a share of a company's stock as a multiple of current earnings.
• B)A high Price/Earnings ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income.
• C)If EPS decreases and there is no change in the market price of the stock,the Price/Earnings ratio will decrease.
• D)If the market price of the stock increases and there is no change in EPS,the Price/Earnings ratio will increase.

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Definitions:

Opportunity Rate

The expected rate of return on the best alternative investment option.

Monthly Cash Flows

The net amount of cash being transferred into and out of a business during a particular month.

Miller-Orr Model

A financial model used to manage cash flows and cash reserves, predicting the optimal level of cash balance a company should maintain.

Weekly Interest Rate

The amount of interest charged or earned over a week, often used to describe the rate for loans or savings accounts on a weekly basis.