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A high price-earnings ratio indicates that...?
a) either the stock is overvalued or people have become more optimistic about the corporation's prospects.
b) either the stock is overvalued or people have become less optimistic...
c) either the stock is undervalued or people have become more optimistic...
d) either the stock is undervalued or people have become less optimistic...
e) none are true
Narrowed it down a and d, want to say it's d.
*Letting you guys know I am not being lazy, the teacher did not go over this and gave as a bonus question. It is somewhat confusing, but I, think I have the right answer.
2 Answers
- 8 years agoFavorite Answer
It's A. A price to earnings ratio (P/E) is how much a stock costs per share to how much earnings the company made per share of outstanding stock (all stocks being held by investors). So, let's say a stock costs $30 per share, but the company earned $3 per share over a 12-month period. That's a P/E of 10, which isn't bad. But, if a company's stock price is soaring without any increase in earnings, this increases the company's P/E. This indicates that the stock is either overvalued (you have to pay too much for a stock with so little company earnings) or people think the company is going to seriously increase it's earnings in the near future.
- boxinglobsterLv 48 years ago
it's A actually. High P/E means people are over-paying "Price" to the value of the company, based on "Earnings". In other words, they are either OVER-valuing the stock.... OR they are really optimistic about it's future prospects and therefore willing to pay too much today.
