Companies E and P each reported the same earnings per share (EPS),but Company E's stock trades at a higher price.Which of the following statements is CORRECT?
A) Company E probably has fewer growth opportunities.
B) Company E is probably judged by investors to be riskier.
C) Company E must have a higher market-to-book ratio.
D) Company E must pay a lower dividend.
E) Company E trades at a higher P/E ratio.

Question

Quizplus · Accepted Answer

The price-to-earnings (P/E) ratio is a commonly used valuation metric in finance. It is calculated by dividing the market price per share by the EPS. If two companies have the same EPS, but one is trading at a higher price, it means that the market is willing to pay more for each dollar of earnings of that company. This suggests that investors have higher expectations of future growth and profitability for Company E, which leads to a higher P/E ratio. Therefore, choice E is the best answer. The other choices are not necessarily true or relevant to this scenario.

Companies E and P Each Reported the Same Earnings Per