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.

Step-by-step 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 =
`(Market\ Price)/(EPS)`

=
`(15)/(5)`

= 3

Price-earning ratio at New price =
`(Market\ Price)/(EPS)`

=
`(18)/(5)`

= 3.6

Hence, price-earnings ratio increases.