NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationEasy
A portfolio manager is analyzing a company's price-to-earnings (P/E) ratio. If a company's stock price is $50 per share and its earnings per share (EPS) is $2.50, what is its P/E ratio?
- A0.05
- B52.5
- C20
- D12.5
Show answer & explanationAnswer & explanation
Correct answer: C. 20
The Price-to-Earnings (P/E) ratio is calculated by dividing the stock price per share by the earnings per share (EPS). So, $50 / $2.50 = 20.
Why the other options are wrong
- A. This is the inverse of the P/E ratio (EPS / Stock Price).
- B. This incorrectly adds the stock price and EPS.
- D. This is an incorrect calculation, possibly multiplying price by EPS.
Price-to-Earnings (P/E) Ratio
A valuation ratio that measures a company's current share price relative to its per-share earnings.
- Formula: Market Price Per Share / Earnings Per Share (EPS).
- Indicates how much investors are willing to pay for each dollar of earnings.
- Higher P/E often implies higher growth expectations.
Memory trick: How much is this company worth, relative to its performance?