Following are price-earnings (P/E) ratios on December 10, 2008, for several prominent companies:
P/E Ratio
Pfizer Inc....................................................... 10.6
Lowe’s Cos.................................................... 13.3
Sears Holdings Corp...................................... 22.6
JPMorgan Chase & Co................................... 16.9
Microsoft....................................................... 10.9
Berkshire Hathaway Inc. Cl A....................... 21.3
General Motors.............................................. 0.0
Required:
(a) What factors may account for the large variance in the P/E ratios of the companies listed?
(b) Why would the P/E of General Motors have been 0.0 (as was Ford Motor’s P/E ratio) on that date?
(c) Explain the difference between a company’s P/E ratio and its market price to book value ratio. Which of these two ratios do you believe is more relevant to potential investors? Defend your answer.