Final answer:
A company with a P/E ratio higher than the market index likely has greater anticipated earning growth than the average firm. This reveals investors' higher future expectations for the company's performance. Over time, high growth expectations have taken precedence over dividend yields, influencing P/E ratios. Correct option is e)
Step-by-step explanation:
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has an anticipated earning growth rate which is higher than that of the average firm. This higher P/E ratio implies that investors expect the company to generate future earnings at a growth rate that surpasses the market average, justifying a higher price for its stock relative to the current earnings. Because stock prices are based on future expectations, a company with a high P/E ratio is often seen as having better prospects for future growth, whereas those with lower ratios might be considered as having poorer prospects. However, it's worth noting that high growth expectations also increase the risk factor; if a company does not meet these expectations, its stock price could be subject to greater volatility.
Considering historical data, it is evident that dividend yields have declined over the years, and investors have shifted focus towards companies that promise higher capital gains through stock price appreciation, which is often reflected in their P/E ratios.