If the P/E ratio of a company\'s common stock were 12, and its earnings were $2.

Question

If the P/E ratio of a company's common stock were 12, and its earnings were $2.50 per common share:

A) the market value of the common stock would be $20.83 per share.
B) the market value of the common stock would be $25.00 per share.
C) an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $2.40 per share.
D) an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $1.67 per share.

Explanation / Answer

P/E=12 E=2.5 P=2.5*12 =$30 an increase in earnings of $0.20 per share P/(2.5+.2) =12 P=32.4 Change in price =$30-$32.4 =$2.4 Correct Answer C) an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $2.40 per share.

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