When Analyzing a Price-Earnings Ratio

question 76

Multiple Choice

When analyzing a price-earnings ratio,

• A) A higher price-earnings ratio indicates pessimism because the price is too high compared to the earnings.
• B) The higher the price-earnings ratio, the more investors are paying for earnings.
• C) A low ratio indicates that investors expect higher earnings in the future.
• D) Price-earnings ratios are helpful when comparing two companies in the same industry, but not to the market in general.
• E) The price-earnings ratio alone provides enough information to allow an investor to decide whether to invest in a particular stock.

---

Definitions:

Cost of Debt

The effective rate that a company pays on its current debt, incorporating both interest payments and issuance costs.

All Equity Firm

A company that is financed solely through equity without the use of debt or leverage, relying entirely on shareholder funds.

Closely Held

A descriptor for corporations that have a small number of shareholders, with shares not publicly traded and often owned by family members or a small group of investors.

Borrow

The act of obtaining or receiving something with the intention of returning it or its equivalent, often involving money with an agreement to pay interest.