Final answer:
The price-earnings (P/E) ratio of a firm is a measure of the market's expectations for a company's future earnings. The appropriate value of the P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price. If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value.c) The appropriate value of P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price.
Step-by-step explanation:
The price-earnings (P/E) ratio of a firm is a measure of the market's expectations for a company's future earnings. Let's analyze each option to determine which one is true:
1. If the firm's P/E ratio is too low relative to that of similar firms, it means that the market has overvalued its current earnings. This statement is false. A low P/E ratio suggests that the market has undervalued the company's earnings.
2. The higher the P/E ratio, the less investors are willing to pay for each dollar earned by the firm. This statement is false. The higher the P/E ratio, the more investors are willing to pay for each dollar earned by the firm.
3. The appropriate value of P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price. This statement is true. The P/E ratio is used to estimate the stock price by multiplying it with the earnings per share.
4. If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value. This statement is true. A high P/E ratio suggests that investors have high expectations for the company's future earnings.
5. If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment. This statement is false. The P/E ratio does not provide information about the time it would take to double an investment.
Based on the analysis, options c) and d) are true about the price-earnings (P/E) ratio of a firm.