You Are Trying to Choose Between Two Stocks,Widget and Gadget

question 1

Multiple Choice

You are trying to choose between two stocks,Widget and Gadget.Widget has a current stock price of $40.00 and earnings per share of $2.00.Gadget has a current stock price of $30.00 and earnings per share of $1.00.Both are in the media industry and the average P/E ratio for this industry is 12.Use the P/E ratio to determine which stock you anticipate will have higher earnings.

• A) Widget
• B) Gadget
• C) Unable to predict
• D) Widget and Gadget will most likely produce equivalent earnings

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Definitions:

Perfect Competition

An industry structure in which there are many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices.

Demand Curve

A graphical representation of the relationship between the price of a good or service and the quantity demanded by consumers.

Marginal Revenue Curve

A graph showing the change in total revenue for a business that results from selling one additional unit of a product or service.

Perfectly Competitive Industry

A theoretical market structure where there are many buyers and sellers, homogeneous products, no barriers to entry and exit, and perfect information, leading to an efficient allocation of resources.