Multiple Choice
The Price-Earnings (P/E) ratio is calculated by ______.
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14. Financial Statement Analysis
Ratios: Price-Earnings Ratio (PE Ratio)
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
The price-earnings (PE) ratio is computed by taking:
A
Market price per share divided by book value per share
B
Net income divided by total assets
C
Market price per share divided by earnings per share
D
Earnings per share divided by market price per share
Verified step by step guidance1
Understand the concept of the Price-Earnings (PE) ratio: It is a financial metric used to evaluate the relative value of a company's shares. The PE ratio is calculated by dividing the market price per share by the earnings per share (EPS).
Identify the components needed for the calculation: You need the market price per share (the current trading price of one share of the company's stock) and the earnings per share (EPS), which is calculated as net income divided by the number of outstanding shares.
Write the formula for the PE ratio: \( \text{PE Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} \).
Ensure you have the correct values: Verify the market price per share and the EPS from the company's financial statements or stock market data.
Perform the division: Divide the market price per share by the earnings per share to compute the PE ratio. This will give you the value of the PE ratio, which can be used to compare the company's valuation to others in the industry.
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