Word bank: earnings · expectations · shares · value

1. Market cap = share price × .
2. P/E = price ÷ per share (or market cap ÷ net income).
3. High P/E = high .
4. Price is what you pay; is what you get.

1. A company has 10 million shares, and each trades at $25.

   1. What's its market cap?

   • A. $25 million
   • B. $2.5 million
   • C. $250 million
   • D. $35 million

2. A company's market cap is $600 million, and its yearly net income is $20 million.

   2. What's its P/E ratio?

   • A. 30
   • B. 12
   • C. 3
   • D. 620

3. A company with a P/E of 60 reports that profits grew 15% this year. Investors expected 40%.

   3. What's a likely market reaction?

   • A. The price rises because profits grew.
   • B. The price may fall because growth fell short of high expectations.
   • C. Nothing — P/E ratios don't change.
   • D. The company is removed from the stock market.

1. 1. A share costs $30 and the company earns $2 per share. What's the P/E ratio?

2. 2. A company has a $600 million market cap and $40 million in net income. What's its P/E?

1. 1. Would you rather buy a company with a P/E of 10 or 50? What would you want to know first?

2. 2. Why might two smart investors disagree about what a company is worth?