Say that for a number of years a company's share price was around $24 and its earnings per share approximately $2.You determine that its earnings are likely to increase to $2.50 per share this period for various reasons.Which statement is correct?

Question

Quizplus · Accepted Answer

The P/E ratio initially is 12 ($24 share price divided by $2 earnings per share). If earnings increase to $2.50 and the P/E ratio remains stable at 12, the share price would indeed be expected to move to $30 (12 * $2.50). Making a buy recommendation could be reasonable if you believe the earnings increase will positively affect the share price, assuming all other factors remain constant. Thus, if the change in earnings is seen as permanent, all the statements are logically connected and correct.

Say That for a Number of Years a Company's Share