Question

A firm's EPS last year was $1, and it issues an earnings release conveying a current year's EPS of $5. Which of the following do you expect will result in the highest positive price change for the firm's common stock? a. Expected EPS was $5, and the current year EPS is not expected to persist. b. Expected EPS was $4, and the current year EPS is not expected to persist. c. Expected EPS was $4, and the current year EPS is expected to persist.

Answer 1

Correct option is (c)

Step-by-step explanation:

A firm's stock price is dependent on many factors. One of the important factors is EPS or earnings per share. EPS refers to the earnings of the firm apportioned to each stock.

Stock prices rise when EPS announced by the firm is more than what was expected by the market. In this case, firm announced an EPS of $5. Price of common stock will rise if expected EPS was less than the actual. Also, market believed that current EPS will persist for some time.