To determine the price-earnings ratio, divide the market price of the firm's annual earnings per share by the common stock and multiply this number by the firm's average net income for the past 10 years.

Question

Quizplus · Accepted Answer

The formula for calculating the price-earnings ratio is to divide the market price of the firm's common stock by its earnings per share (EPS), not by the common stock. Additionally, the calculation typically only uses the most recent EPS or an average of the last 4 quarters, not the average net income for the past 10 years.

To Determine the Price-Earnings Ratio, Divide the Market Price of the Firm's