Asked by Jackie Ramirez on May 31, 2024
Verified
If Epsilon Company's price-earnings ratio on common stock is greater than Iota Company's, then Iota Company would be expected to have the best potential for future common stock price appreciation.
Price-Earnings Ratio
A financial metric comparing the present price of a corporation's stock to its earnings per share to assess whether the stock is under or overvalued.
Stock Price Appreciation
The increase in the market price of a company's shares over time.
- Understand the consequences of alterations in financial ratios and their significance regarding a company's economic stability and operational effectiveness.
- Acknowledge the value and constraints of earnings per share (EPS) as a measure of business success.
Verified Answer
MS
Mattison StephensonJun 01, 2024
Final Answer :
False
Explanation :
A high price-earnings ratio indicates that the market is willing to pay more for each dollar of earnings of the company, which may suggest that the company's earnings are expected to grow in the future. However, this alone does not necessarily mean that the company has a better potential for future stock price appreciation than a company with a lower price-earnings ratio. Other factors, such as the company's growth prospects, financial strength, industry trends, and market conditions, should also be taken into consideration. Therefore, it is not always true that a higher price-earnings ratio implies a better potential for stock price appreciation.
Learning Objectives
- Understand the consequences of alterations in financial ratios and their significance regarding a company's economic stability and operational effectiveness.
- Acknowledge the value and constraints of earnings per share (EPS) as a measure of business success.
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