McDonald's stock currently sells for $77.50.It's expected earnings per share are $4.50.The average P/E ratio for the industry is 23.3.If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry,it's stock price would:
A)stay about the same.
B)rise.
C)fall.
D)there is not enough information.

Question

Quizplus · Accepted Answer

To calculate the expected stock price, we can use the formula P/E ratio x EPS. 
The P/E ratio for the industry is 23.3, so multiplying that by McDonald's EPS of $4.50 gives us an expected stock price of $104.85. 
Since McDonald's current stock price is $77.50, we can see that it has room to rise to meet the industry average. Therefore, the answer is B.

McDonald's Stock Currently Sells for $77