[Anonymous]

Investors are likely to view a high price earnings (P/E) ratio as an indication that:

a. Earnings have growth potential

b. Earnings have peaked and will remain flat

c. Earnings have peaked and will likely fall

d. There is no logical conclusion to reach about the relationship between price and earnings

Choice “a” is correct. The P/E ratio measures the amount that investors are willing to pay for each dollar of earnings per share. Higher P/E ratios generally indicate that investors are anticipating more growth and are bidding up the price of the shares in advance of performance.

I’m confused by this answer. I thought P/E ratio measures the amount investors PROJECT to pay for each dollar, not willing. And even if it were willing, isn’t a high P/E ratio an indication that this investment is “expensive”? Why would I be expecting growth.