The relationship between a firm's earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the:
A)financial leverage ratio
B)debt-equity ratio
C)capital intensity ratio
D)market-to-book ratio
E)price-earnings ratio

Question

Quizplus · Accepted Answer

The relationship between a firm's earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the price-earnings ratio (P/E ratio). This ratio is a measure of the market's valuation of a company and its potential for future growth. A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings, which may suggest that the company is expected to grow in the future. Therefore, the best choice for this question is E, price-earnings ratio.

The Relationship Between a Firm's Earnings and the Multiple of Those