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

A stock quote shows a P/E of 18. How is the Price-Earnings (P/E) ratio defined?

Earnings per share divided by market price per share

Market price per share divided by book value per share

Market price per share divided by earnings per share

Dividends per share divided by earnings per share

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Verified step by step guidance

Step 1: Understand the concept of the Price-Earnings (P/E) ratio. The P/E ratio is a financial metric used to evaluate the valuation of a company's stock by comparing its market price to its earnings per share (EPS). It helps investors determine whether a stock is overvalued or undervalued.

Step 2: Recall the formula for the P/E ratio. The P/E ratio is defined as:

\frac{Market Price per Share}{Earnings per Share}

. This formula indicates how much investors are willing to pay for each dollar of earnings.

Step 3: Analyze the options provided in the problem. The correct definition of the P/E ratio is 'Market price per share divided by earnings per share,' as this aligns with the formula and the purpose of the metric.

Step 4: Eliminate incorrect options. For example, 'Earnings per share divided by market price per share' is the inverse of the P/E ratio, and 'Market price per share divided by book value per share' refers to a different metric called the Price-to-Book (P/B) ratio.

Step 5: Confirm the correct answer. Based on the formula and the explanation, the correct definition of the P/E ratio is 'Market price per share divided by earnings per share.' This is the standard interpretation used in financial accounting and investment analysis.