An investor who uses the P/E ratio approach to value a firm's common stock would simply multiply the most recently reported earnings per share (EPS)by the current dividend per share to determine the value.

Question

Quizplus · Accepted Answer

The P/E ratio approach involves dividing the current market price per share by the earnings per share (EPS) to determine the P/E ratio. This ratio is then compared to industry averages or historical averages to determine if the stock is overvalued or undervalued. The current dividend per share does not factor into this calculation.

An Investor Who Uses the P/E Ratio Approach to Value