Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?
A) Company J must have a higher P/E ratio.
B) Company J must have a higher market to book ratio.
C) Company J must be riskier.
D) Company J must have fewer growth opportunities.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

The most likely reason for Company J's stock trading at a higher price despite both companies having the same EPS is that investors perceive Company J to have higher growth prospects or less risk than Company K. This would result in a higher P/E ratio for Company J. The market to book ratio and risk level cannot be determined from the given information, and it is unlikely that Company J would have fewer growth opportunities if both companies have the same EPS. Therefore, only choice A is the most correct statement.

Company J and Company K Each Recently Reported the Same