Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A)Al's has more net income than Ben's.
B)Ben's is increasing its earnings at a faster rate than the Al's.
C)Al's has a higher market value per share than does Ben's.
D)Ben's has a lower market-to-book ratio than Al's.
E)Al's has a higher net income than Ben's.

Question

Quizplus · Accepted Answer

The PEG ratio is calculated by dividing the price-earnings ratio by the annual earnings growth rate of the company. If Al's has a higher PEG ratio than Ben's, it means that Al's is growing more slowly than Ben's. Therefore, choice B must be true: Ben's is increasing its earnings at a faster rate than Al's. The other choices cannot be determined based on the given information.

Al's Has a Price-Earnings Ratio of 18