If the market price-earnings ratio is 10 and a company's P/E ratio is 12, what does this indicate about the market's expectations for the company's future earnings relative to the market?

• A. A Profits to fall sharply in the near future, relative to the market.
• B. B Profits to grow slower than the rest of the market.
• C. C Share price to fall more than the overall market.
• D. D Future earnings to grow at a faster rate than the overall market.

Answer: (D)

P/E ratio shows how much investors are willing to pay for each dollar of current earnings, reflecting growth expectations. If a company's P/E is higher than the market average, it means investors expect its earnings to grow faster in the future than the market as a whole. In this case, the market P/E is 10 while the company’s is 12, signaling that investors anticipate the company’s earnings to grow more quickly than overall market earnings.