213.7
7.You and your friend are talking about investing. Your friend notes that utility stocks
have P/E ratios around 10 while technology stocks (such as Microsoft) have a P/E ratio
around 40! He/she says, "Why would anyone buy Microsoft--it's way overpriced relative
to the utility stocks--they're a bargain!" Is this analysis correct? Why or why not?
(7 pts.)
No. Investors are expecting a lot more growth out of Microsoft than utility stocks and they're pricing that. Thus, MSFT's stock price looks high relative to its current earnings, but those earnings are expected to grow considerably in the future. Utility stocks, with lower multiples of earnings are priced correctly considering that their earnings are not expected to grow much in the future.