Which method of determining a firm's net worth divides the market price of the firm's stock by the annual earnings per share, and multiplies this number by the firm's average net income for the past five years?
A) Debt/equity method
B) Current ratio method
C) Price-earnings ratio method
D) Long-term asset method
E) Outstanding shares method

Question

Quizplus · Accepted Answer

The method described in the question is the price-earnings ratio method, also known as the P/E ratio method. This method is commonly used in the financial industry to determine a company's value or net worth based on its earnings. It calculates the market price per share of a company's stock by dividing the current market price of the stock by the annual earnings per share (EPS). This ratio is then multiplied by the average net income of the company over a specified period, typically five years or more. This method is useful for investors who want to compare the value of different companies in the same industry.

Which Method of Determining a Firm's Net Worth Divides the Market