Managerial Accounting (15th Edition)

Published by McGraw-Hill Education
ISBN 10: 007802563X
ISBN 13: 978-0-07802-563-1

Chapter 15 - Financial Statement Analysis - Questions - Page 697: 15-3

Answer

In the case of our problems, a stock which has a current earning equal to \$4 and a price earning ratio with a value of 20, will be able to sell for $80/ share.

Work Step by Step

Price earning ratios have the role of reflecting the investors' expectations in regard to the future earnings. This means that the higher the price earning ratio is, the greater will be the gains in terms of the earnings expected by the investor. This also explains why a company can have different price earnings ratios but the same current earnings.
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