Series 7 Exam Question 396: Answer and Explanation

Question: 396

ABC stock pays an annual dividend of $4, has an earnings per share of $8, and a market price of $40. What is ABC's PE ratio?

• A. 2
• B. 5
• C. 10
• D. 20

Correct Answer: B

Explanation:

B. The "P" in PE ratio stands for "market Price," the "E" stands for "Earnings per share," and the word "ratio" lets you know that you need to divide. So let's set up the equation:

The market price is $40 and the earnings per share is $8, so that means that the PE ratio is 5.