Compute Topp Company’s price-earnings ratio if its common stock has a market value of $29.04 per share and its EPS is $4.80. Considering Lower deck, its key competitor, has a PE ratio of 9.5, which company does the market have higher expectations of future performance?

Since the Lower deck's price-earnings ratio of 9.5 is higher than Topp Company’s price-earnings ratio of 6.05, the market therefore have higher expectations of future performance of Lower deck.

Explanation:

Price-earnings ratio refers to the ratio of the market price per share (MPS) to the earning per share (EPS) of a company.

Topp Company’s price-earnings ratio can therefore, be computed using the following formula:

Topp Company’s price-earnings ratio = MPS / EPS (1)

Where;

MPS = Common stock market value = $29.04

EPS = $4.80

Substituting into equation (1), we have:

Topp Company’s price-earnings ratio = $29.04 / $4.80 = 6.05

It should be noted that companies that have a high Price Earnings Ratio are usually referred as growth stocks. The implication of this is that there is a positive future performance which makes investors to have higher expectations for future earnings growth. As a result, the investors are ready to pay more for the stock of the firms.

Since the Lower deck's price-earnings ratio of 9.5 is higher than Topp Company’s price-earnings ratio of 6.05, the market therefore have higher expectations of future performance of Lower deck.

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.