Question

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. What would happen to the company's price-earnings ratio? A. Remain unchanged B. Impossible to determine. C. Increase D. Decrease

Answer 1

Answer: Option (C) is correct.

Explanation:

Given that,

Old market price of stock = $15

New market price of stock = $18

Here, we assume that EPS be $5.

So,

Price-earning ratio at old price = $\frac{Market\ Price}{EPS}$

                                                   =  $\frac{15}{5}$

                                                   = 3

Price-earning ratio at New price = $\frac{Market\ Price}{EPS}$

                                                   =  $\frac{18}{5}$

                                                   = 3.6

Hence, price-earnings ratio increases.