Which of the following statements is FALSE?a.The most common valuation multiple is the price-earnings (P/E) ratio.b.The intuition behind the use of the P/E ratio is that when you buy a stock, you are in a sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.c.A firm's P/E ratio is equal to the share price divided by its earnings per share.d.None of them.e.You should be willing to pay proportionally more for a stock with lower current earnings.
Question
Which of the following statements is FALSE?a.The most common valuation multiple is the price-earnings (P/E) ratio.b.The intuition behind the use of the P/E ratio is that when you buy a stock, you are in a sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.c.A firm's P/E ratio is equal to the share price divided by its earnings per share.d.None of them.e.You should be willing to pay proportionally more for a stock with lower current earnings.
Solution
The correct answer is e. You should be willing to pay proportionally more for a stock with lower current earnings.
This statement is false because typically, investors are willing to pay more for a stock with higher current earnings. The price-earnings (P/E) ratio, which is calculated by dividing the market value per share by earnings per share, is a valuation ratio used by investors to gauge a company's profitability. A lower P/E ratio could indicate that the stock is undervalued, but it could also suggest that the company is not expected to have strong future earnings. Therefore, a stock with lower current earnings does not necessarily make it more attractive to investors.
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