Which of the following statements is CORRECT?
A)If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.
B)If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
C)If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.
D)If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate.
E)If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

Question

Quizplus · Accepted Answer

The P/E ratio is calculated by dividing the market price per share by the earnings per share. If Firms X and Y have the same net income, number of shares outstanding, and price per share, their earnings per share and market price per share would be the same, and therefore their P/E ratios would also be the same. However, the market-to-book ratio is calculated by dividing the market value per share by the book value per share, which is not necessarily related to the P/E ratio. Therefore, statement A and C are incorrect. Statement D is also incorrect as a higher P/E ratio implies the market is willing to pay more per dollar of earnings, indicating higher growth prospects and/or lower risk. Statement E is also incorrect because the market-to-book ratio can vary depending on the company's book value, which may not be the same even if the net income, number of shares outstanding, and price per share are the same.

Which of the Following Statements Is CORRECT