Asked by Rachel Dominguez on May 23, 2024
Verified
Companies E and P each reported the same earnings per share (EPS) ,but Company E's stock trades at a higher price.Which of the following statements is correct?
A) Company E probably has fewer growth opportunities than company P.
B) Company E is probably judged by investors to be riskier than company P.
C) Company E must pay a lower dividend than company P.
D) Company E trades at a higher P/E ratio than company P.
P/E Ratio
Price to Earnings (P/E) ratio is a valuation metric that compares the price of a stock to its per-share earnings, indicating how much investors are willing to pay per dollar of earnings.
Earnings Per Share
A company's profit divided by the number of outstanding shares of its common stock.
- Discern the influence of leverage on the financial performance and risk assessment of a firm.
Verified Answer
DM
Daniel MedinMay 25, 2024
Final Answer :
D
Explanation :
Since both E and P have the same EPS, the higher stock price for Company E indicates that investors are willing to pay more for each dollar of earnings. This means that Company E likely has a higher P/E ratio than Company P, which could be due to factors such as a stronger brand or better growth prospects. Thus, choice D is the correct answer. Note that we cannot infer anything about growth opportunities, riskiness, or dividends solely based on the information given.
Learning Objectives
- Discern the influence of leverage on the financial performance and risk assessment of a firm.
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