If a firm's price to earnings (P/E) ratio is 10, ____.
A) it is not possible for it to be paying dividends also
B) its market to book ratio has to be at least 2.0
C) its net profit margin is positive
D) its return on stockholders' equity is negative

Question

Quizplus · Accepted Answer

A P/E ratio of 10 means that the company's stock is trading at 10 times its earnings per share. This does not have any direct implication on whether the company pays dividends or not. The market to book ratio is not related to the P/E ratio. A positive net profit margin indicates that the company is profitable, which is likely why investors are willing to pay 10 times its earnings for the stock (resulting in a P/E ratio of 10). A negative return on stockholders' equity would be a concern for investors, but this is not a necessary implication of a P/E ratio of 10.

If a Firm's Price to Earnings (P/E) Ratio Is 10