The patent on a major drug produced by a pharmaceutical company will soon expire.Sales of the drug contribute 10% to the company's net income.Which of the following statements is most likely to be true in these circumstances?
A)The P/E ratio will probably fall when the patent ends.
B)The P/E ratio will probably rise because the share price will rise and the earnings will fall.
C)The P/E ratio will probably fall as investors factor in the future drop in net income.
D)The P/E ratio will probably rise because the share price will fall and the earnings will fall.

Question

Quizplus · Accepted Answer

The expiration of the patent and resulting drop in net income will likely cause investors to factor in this future decrease, leading to a lower P/E ratio. Option A, B, and D are incorrect because they do not accurately reflect how the expiration of the patent will affect the P/E ratio.

The Patent on a Major Drug Produced by a Pharmaceutical