A stock's price-to-earnings (P/E) ratio is 20. If the company's earnings per share is $3.00, the stock price is:

Question

Accepted Answer

$60.00. The stock price is $60.00, calculated by multiplying the P/E ratio by earnings per share: 20 × $3.00 = $60.00. The P/E ratio tells investors how much they are paying for each dollar of earnings, so a P/E of 20 means the market values the stock at 20 times its annual earnings.

$6.67 would result from dividing EPS by the P/E ratio ($3.00 ÷ 20 × some factor), which inverts the relationship. $23.00 appears to add the P/E ratio to EPS ($20 + $3 = $23), which is a meaningless calculation that confuses the ratio with a dollar amount. $17.00 might come from subtracting EPS from the P/E ratio ($20 - $3 = $17), another nonsensical operation.

The P/E ratio is one of the most widely used valuation metrics in finance and is frequently tested on the DSST exam. A high P/E may indicate that investors expect strong future growth, while a low P/E may suggest the stock is undervalued or that the company faces challenges. Comparing P/E ratios across companies in the same industry provides meaningful relative valuation insights.

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