Price/Earnings Ratio MCQs
What does the P/E ratio measure?
A) The company’s total assets B) The market value per share relative to earnings per share C) The company’s debt relative to equity D) The company’s dividend yield
Answer: B) The market value per share relative to earnings per share
How is the P/E ratio calculated?
A) Market Price per Share / Earnings per Share B) Earnings per Share / Market Price per Share C) Market Price per Share / Dividend per Share D) Earnings per Share / Dividend per Share
Answer: A) Market Price per Share / Earnings per Share
A company has a stock price of $50 and earnings per share (EPS) of $5. What is the P/E ratio?
A) 10 B) 20 C) 5 D) 15
Answer: B) 10
Calculation: P/E Ratio = Price per Share / EPS = 50 / 5 = 10
If a company’s P/E ratio is 25, what can be inferred about its stock price relative to its earnings?
A) The stock price is low relative to its earnings B) The stock price is high relative to its earnings C) The stock price is equal to its earnings D) The stock price is irrelevant to its earnings
Answer: B) The stock price is high relative to its earnings
What does a high P/E ratio generally indicate about a company’s stock?
A) The company is undervalued B) The company has low growth potential C) The company is expected to have high growth in the future D) The company has high debt
Answer: C) The company is expected to have high growth in the future
What is the main limitation of using the P/E ratio for valuation?
A) It does not consider the company’s growth rate B) It includes debt in the calculation C) It considers historical dividend payments D) It does not account for differences in accounting practices
Answer: D) It does not account for differences in accounting practices
If Company A has a P/E ratio of 12 and Company B has a P/E ratio of 20, which company is generally considered more expensive?
A) Company A B) Company B C) Both are equally expensive D) It cannot be determined
Answer: B) Company B
How does a lower P/E ratio generally affect investor perception?
A) The stock is seen as overvalued B) The stock is seen as undervalued C) The stock has high growth potential D) The stock has low growth potential
Answer: B) The stock is seen as undervalued
Which of the following factors can cause a P/E ratio to increase?
A) A decrease in earnings B) An increase in earnings C) A decrease in stock price D) An increase in stock price
Answer: D) An increase in stock price
If a company’s earnings per share (EPS) increases from $4 to $5 and its stock price remains the same, what happens to the P/E ratio?
A) The P/E ratio increases B) The P/E ratio decreases C) The P/E ratio remains the same D) The P/E ratio becomes negative
Answer: B) The P/E ratio decreases
Calculation: P/E Ratio = Price per Share / EPS
Which P/E ratio is typically more reliable: trailing P/E or forward P/E?
A) Trailing P/E B) Forward P/E C) Both are equally reliable D) It depends on the company’s financial stability
Answer: A) Trailing P/E
The P/E ratio is often used in comparison with which of the following?
A) Dividend Yield B) Price-to-Book Ratio C) Other companies in the same industry D) Price-to-Sales Ratio
Answer: C) Other companies in the same industry
What is a potential problem with relying solely on the P/E ratio for investment decisions?
A) It does not consider the company’s market capitalization B) It may not account for future growth prospects C) It does not include the company’s dividend history D) It includes non-operating income
Answer: B) It may not account for future growth prospects
If a company’s P/E ratio is significantly higher than the industry average, what might it suggest?
A) The company is undervalued B) The company is overvalued C) The company has high debt D) The company has low growth potential
Answer: B) The company is overvalued
Which type of P/E ratio is based on forecasted earnings?
A) Trailing P/E B) Forward P/E C) Historical P/E D) Adjusted P/E
Answer: B) Forward P/E
What effect does a stock buyback generally have on the P/E ratio?
A) It decreases the P/E ratio B) It increases the P/E ratio C) It has no effect on the P/E ratio D) It makes the P/E ratio unpredictable
Answer: B) It increases the P/E ratio
Which scenario is likely to cause a P/E ratio to decline?
A) An increase in stock price B) An increase in earnings C) A decrease in earnings D) A decrease in stock price
Answer: C) A decrease in earnings
If a company has a P/E ratio of 18 and earns $3 per share, what is the stock price?
A) $54 B) $60 C) $45 D) $30
Answer: A) $54
Calculation: Stock Price = P/E Ratio × EPS = 18 × 3 = 54
What does a P/E ratio of 0 indicate?
A) The company is profitable B) The company has zero earnings C) The company is overvalued D) The company is undervalued
Answer: B) The company has zero earnings
What can cause a P/E ratio to be temporarily distorted?
A) Seasonal fluctuations in earnings B) Changes in the company’s dividend policy C) A new product launch D) Changes in management
Answer: A) Seasonal fluctuations in earnings
In the context of P/E ratios, what does “earnings manipulation” refer to?
A) Adjusting earnings to make them appear higher or lower B) Changing the stock price to reflect market conditions C) Adjusting dividends to match earnings D) Altering the P/E ratio to fit industry norms
Answer: A) Adjusting earnings to make them appear higher or lower
A company with a P/E ratio of 15 is generally considered to be:
A) Overvalued B) Fairly valued C) Undervalued D) Highly speculative
Answer: B) Fairly valued
What role does the P/E ratio play in growth stock analysis?
A) It measures the company’s historical dividend payments B) It assesses the company’s future earnings growth potential C) It evaluates the company’s debt levels D) It tracks the company’s past stock performance
Answer: B) It assesses the company’s future earnings growth potential
Which financial metric would you use alongside the P/E ratio for a more comprehensive analysis?
A) Dividend Yield B) Price-to-Book Ratio C) Price-to-Sales Ratio D) All of the above
Answer: D) All of the above
If a company’s stock price is $100 and its earnings per share is $8, what is the P/E ratio?
A) 12.5 B) 10 C) 14 D) 8
Answer: A) 12.5
Calculation: P/E Ratio = Price per Share / EPS = 100 / 8 = 12.5
Which of the following factors is likely to result in a higher P/E ratio?
A) Decreased market interest rates B) Increased market interest rates C) Increased company debt D) Lower company earnings
Answer: A) Decreased market interest rates
Why might investors prefer a company with a lower P/E ratio?
A) They believe the company is undervalued B) They expect high future earnings growth C) The company has low growth prospects D) The company has high debt levels
Answer: A) They believe the company is undervalued
What does a rising P/E ratio often suggest about investor expectations?
A) Lower growth expectations B) Stable earnings C) Higher future growth expectations D) Decreased market sentiment
Answer: C) Higher future growth expectations
Which of the following is a reason a company might have a low P/E ratio?
A) High expected future earnings B) Declining or negative earnings C) High dividend payments D) Stable earnings growth
Answer: B) Declining or negative earnings
If a company’s P/E ratio is decreasing, what might this indicate?
A) Increased investor confidence B) Increasing stock price C) Decreasing earnings or stock price D) Increased earnings and stock price
Answer: C) Decreasing earnings or stock price
How does the P/E ratio of a growth stock typically compare to that of a value stock?
A) Lower for growth stocks B) Higher for growth stocks C) The same for both D) It depends on the market conditions
Answer: B) Higher for growth stocks
If a company has a P/E ratio of 8 and its stock price is $64, what is its EPS?
A) $8 B) $16 C) $32 D) $80
Answer: B) $8
Calculation: EPS = Price per Share / P/E Ratio = 64 / 8 = 8
Which factor is LEAST likely to affect the P/E ratio?
A) Changes in interest rates B) Variations in earnings C) Fluctuations in stock price D) Changes in the company’s dividend policy
Answer: D) Changes in the company’s dividend policy
A company with a P/E ratio of 30 and a stock price of $150 has what EPS?
A) $5 B) $10 C) $15 D) $20
Answer: B) $5
Calculation: EPS = Price per Share / P/E Ratio = 150 / 30 = 5
Which of the following is a characteristic of a stock with a high P/E ratio?
A) Low growth expectations B) High growth expectations C) High dividend yield D) High debt-to-equity ratio
Answer: B) High growth expectations
If a company’s earnings are expected to decline, what is likely to happen to its P/E ratio, assuming the stock price remains constant?
A) The P/E ratio will increase B) The P/E ratio will decrease C) The P/E ratio will remain unchanged D) The P/E ratio will become negative
Answer: B) The P/E ratio will decrease
What is the typical use of the P/E ratio in fundamental analysis?
A) To measure a company’s profitability relative to its stock price B) To calculate a company’s dividend yield C) To assess a company’s debt levels D) To determine the company’s market capitalization
Answer: A) To measure a company’s profitability relative to its stock price
Which P/E ratio is calculated using historical earnings?
A) Forward P/E B) Trailing P/E C) Adjusted P/E D) Projected P/E
Answer: B) Trailing P/E
How does a company’s P/E ratio affect its stock valuation compared to other companies?
A) It provides a relative measure of how expensive or cheap a stock is B) It determines the company’s market value C) It reflects the company’s cash flow situation D) It shows the company’s financial stability
Answer: A) It provides a relative measure of how expensive or cheap a stock is
If two companies have the same P/E ratio but different growth rates, how should an investor view them?
A) The companies are equally attractive B) The company with the higher growth rate may be more attractive C) The company with the lower growth rate may be more attractive D) The P/E ratio is irrelevant to growth rates
Answer: B) The company with the higher growth rate may be more attractive
How does a company’s P/E ratio typically change when it is about to release its quarterly earnings report?
A) It remains constant B) It decreases C) It increases D) It becomes unpredictable
Answer: D) It becomes unpredictable
What does a declining P/E ratio suggest about investor sentiment?
A) Increased optimism about future earnings B) Decreased optimism about future earnings C) Stable investor sentiment D) Increased dividend payments
Answer: B) Decreased optimism about future earnings
Which of the following is true about companies with a P/E ratio of 1 or less?
A) They are usually in financial trouble or have negative earnings B) They have high growth prospects C) They typically offer high dividends D) They are considered stable and mature
Answer: A) They are usually in financial trouble or have negative earnings
How can a company’s share buyback program impact its P/E ratio?
A) It generally lowers the P/E ratio B) It generally increases the P/E ratio C) It has no effect on the P/E ratio D) It causes the P/E ratio to fluctuate
Answer: B) It generally increases the P/E ratio
What can cause a company’s P/E ratio to appear artificially high?
A) Excessive earnings B) Low stock price C) Low earnings D) High dividends
Answer: C) Low earnings
Which P/E ratio type is more focused on future performance?
A) Trailing P/E B) Forward P/E C) Historical P/E D) Adjusted P/E
Answer: B) Forward P/E
What is a potential advantage of using the P/E ratio over other valuation metrics?
A) It directly compares earnings with stock price B) It includes dividend payments C) It considers the company’s debt levels D) It accounts for market conditions
Answer: A) It directly compares earnings with stock price
If a company has negative earnings, what happens to its P/E ratio?
A) It becomes positive B) It becomes zero C) It is not calculable D) It reflects a higher stock price
Answer: C) It is not calculable
Which of the following scenarios is likely to increase a company’s P/E ratio?
A) A significant decrease in earnings B) A substantial increase in stock price C) A decrease in stock price D) A rise in interest rates
Answer: B) A substantial increase in stock price
What is the significance of comparing a company’s P/E ratio with its historical average?
A) It helps in assessing whether the stock is currently overvalued or undervalued B) It shows changes in dividend policy C) It evaluates the company’s debt levels D) It compares historical earnings with future earnings
Answer: A) It helps in assessing whether the stock is currently overvalued or undervalued