Last year, New Flying Industries had a price-earnings ratio of 15. This year, the price earnings ratio is 18. Based on this information, it can be stated with certainty that:
A) The price per share increased.
B) The earnings per share decreased.
C) Investors are paying a higher price for each share of stock purchased.
D) Investors are receiving a higher rate of return this year.
E) Either the price per share, the earnings per share, or both changed.

Question

Quizplus · Accepted Answer

The price-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). An increase in the P/E ratio from 15 to 18 indicates that either the price per share increased, the earnings per share decreased, or both occurred. This change does not necessarily indicate which specific factor(s) altered, only that there was a change in the relationship between the price per share and the earnings per share.

Last Year, New Flying Industries Had a Price-Earnings Ratio of 15