Finance: P/E Ratio The price of a share of stock divided

Chapter , Problem 19

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Finance: P/E Ratio The price of a share of stock divided by the companys estimated future earnings per share is called the P/E ratio. High P/E ratios usually indicate growth stocks, or maybe stocks that are simply overpriced. Low P/E ratios indicate value stocks or bargain stocks. A random sample of 51 of the largest companies in the United States gave the following P/E ratios (Reference: Forbes). 11 35 19 13 15 21 40 18 60 72 9 20 29 53 16 26 21 14 21 27 10 12 47 14 33 14 18 17 20 19 13 25 23 27 5 16 8 49 44 20 27 8 19 12 31 67 51 26 19 18 32 (a) Use a calculator with mean and sample standard deviation keys to verify that and s 15.5. (b) Find a 90% confidence interval for the P/E population mean m of all large U.S. companies. (c) Find a 99% confidence interval for the P/E population mean m of all large U.S. companies. (d) Interpretation: Bank One (now merged with J. P. Morgan) had a P/E of 12, AT&T Wireless had a P/E of 72, and Disney had a P/E of 24. Examine the confidence intervals in parts (b) and (c). How would you describe these stocks at the time the sample was taken?