XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10.It is likely that
A) XYZ's earnings per share are twice the earnings per share of EFG.
B) investors expect XYZ's earnings to grow faster than EFG's earnings.
C) investors believe that for the same level of earnings growth, XYZ is a higher risk company.
D) investors believe XYZ stock is overvalued.

Question

Quizplus · Accepted Answer

A higher P/E ratio generally indicates that investors are willing to pay more for each dollar of earnings because they expect higher future earnings growth. Therefore, it is likely that investors expect XYZ's earnings to grow faster than EFG's earnings. Option A cannot be assumed based on P/E ratio alone. Option C is also not necessarily true, as risk perception is subjective and not solely based on P/E ratio. Option D cannot be concluded based solely on the P/E ratio without considering other factors such as the company's financial performance and market conditions.

XYZ Corporation Has a P/E Ratio of 20 and EFG