Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Price-Earnings Ratio (PE Ratio)

Financial Accounting

14. Financial Statement Analysis

Ratios: Price-Earnings Ratio (PE Ratio)

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Multiple Choice

Which of the following correctly defines the Price-Earnings (PE) Ratio?

Earnings per share divided by market price per share

Market price per share multiplied by earnings per share

Market price per share divided by earnings per share

Total earnings divided by total number of shares

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Verified step by step guidance

Understand the concept of the Price-Earnings (PE) Ratio: It is a financial metric used to evaluate the relationship between a company's stock price and its earnings per share (EPS). It helps investors assess whether a stock is overvalued or undervalued.

Identify the formula for the PE Ratio: The formula is \( \text{PE Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} \). This means the market price per share is divided by the earnings per share.

Clarify the components: The 'Market Price per Share' refers to the current trading price of one share of the company's stock, while 'Earnings per Share' (EPS) is calculated as \( \text{EPS} = \frac{\text{Net Income}}{\text{Total Number of Shares Outstanding}} \).

Compare the options provided: Evaluate each option against the correct formula. For example, 'Earnings per share divided by market price per share' is incorrect because it reverses the formula. Similarly, 'Market price per share multiplied by earnings per share' is incorrect because multiplication is not part of the PE Ratio calculation.

Conclude with the correct definition: The correct definition of the PE Ratio is 'Market price per share divided by earnings per share,' as this aligns with the standard formula used in financial accounting.