Question

Which one of the following statements is true concerning the price-earnings (PE) ratio? 1) The PE ratio is a constant value for each firm. 2) A PE ratio of 16 indicates that investors are willing to pay $16 for every $1 of current earnings. 3) A high PE ratio indicates that a firm is undervalued. 4) PE ratios are unaffected by the accounting methods employed by a firm. 5) The PE ratio is classified as a profitability ratio. Question 2 (1 point) Financial Analysts use benchmarking and trend analysis when conducting ratio analysis to assess a company's financial health. True False

Answer 1

1: Option 2

1: False since price is changing, the PE ratio is also constantly changing.

2: True: PE Ratio indicates the price payable per dollar of earnings.

3: FALSE: High PE Ratio means the firm is overvalued

4: False: Accounting methods affect the EPS and thereby the PE Ratio.

5: False: PE ratio is a price ratio

2: True

Benchmarking allows the managers to have a target in mind while trend analysis allows them to understand if the ratio trends are rising or falling.