Series 7 Exam Question 249: Answer and Explanation

Question: 249

PE ratio equals

• A. the market price divided by the earnings per share
• B. annual dividends per common share divided by the market price
• C. annual dividends per common share divided by the earnings per share
• D. net income minus preferred dividends divided by the number of common shares outstanding

Correct Answer: A

Explanation:

A. The PE ratio is a tool that can be used by technical analysts to help determine whether a stock is overpriced or underpriced. Typically, they will compare the PE ratios of several different companies within the same industry to see if there may be a good investment opportunity. Typically, the lower the PE, the better. A company with a low PE ratio means that the earnings per share (EPS) are high as compared to its price. The equation for PE ratio is