Second Cups has a price-earnings ratio of 16. Tam Hortons has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Tam Hortons':
A) Has a higher market price than one share of stock in Second Cups.
B) Has a higher market price per dollar of earnings than one share of Second Cups.
C) Sells at a lower price per share than one share of Second Cups.
D) Represents a larger percentage of ﬁrm ownership than does one share of Second Cups' stock.
E) Earns a greater proﬁt per share than does one share of Second Cups' stock.

Question

Quizplus · Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Therefore, Tam Hortons' higher price-earnings ratio indicates that its market price is higher relative to its earnings than that of Second Cups. So, one share of Tam Hortons' stock has a higher market price per dollar of earnings than one share of Second Cups' stock.

Second Cups Has a Price-Earnings Ratio of 16