One with the price-earnings ratio commonly reported is that:
A) it divides share price,which reflects the present value of future earnings by historical earnings.
B) it divides share price,which reflects the present value of book value by historical earnings.
C) it does not take into consideration the present value of future earnings.
D) it is based on analysts' expectations.

Question

Quizplus · Accepted Answer

The price-earnings ratio is calculated by dividing the current market price per share by earnings per share. It reflects the present value of future earnings by using the past historical earnings as a baseline. Therefore, option A is the correct statement. Option B is incorrect because book value does not relate to future earnings. Option C is also incorrect because the ratio reflects the current value of future earnings. Finally, option D is not always true, as analysts' expectations may not be the only factor that influences the stock price.

One with the Price-Earnings Ratio Commonly Reported Is That