Which of the following statements regarding the P/E ratio is NOT true?
A) The P/E ratio indicates how much investors are willing to pay for a stock as a multiple of current earnings.
B) A high P/E ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income.
C) If EPS decreases and there is no change in the market price of the stock, the P/E ratio will decrease.
D) If the market price of the stock increases and there is no change in EPS, the P/E ratio will increase.

Question

Quizplus · Accepted Answer

If EPS decreases and there is no change in the market price of the stock, the P/E ratio will decrease. This statement is not true; if EPS decreases and the market price of the stock remains unchanged, the P/E ratio will actually increase because earnings are now being divided by a smaller denominator (the stock price).

Which of the Following Statements Regarding the P/E Ratio Is