Question

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company’s price-earnings ratio would:

Answer 1

Increase

Step-by-step explanation:

The price-earnings ratio (PER) is defined as the ratio between the common stock market price and the earnings per share (EPS).

For any given EPS:

Price-earnings ratio at the initial price:

`PER_i = (\$15)/(EPS)`

Price-earnings ratio at the final price:

`PER_f = (\$18)/(EPS)`

Therefore, for any EPS:

`PER_f >PER_i`

The company’s price-earnings ratio would increase