The ordinary share of Securetech Corporation consistently sells at a market price of 20 times earnings, i.e., at a p/e ratio of 20. What would be the most likely effect of a 10 cent increase in Securetech's basic EPS?

Question

Quizplus · Accepted Answer

The increase in basic EPS would result in an increase in earnings, which would likely lead to an increase in the market price of Securetech's ordinary shares. If the p/e ratio remains constant, then the increase in EPS would lead to a proportionate increase in market price. Therefore, a 10 cent increase in EPS would result in an increase of approximately $2 (20 times the increase in EPS) in market price per share.

The Ordinary Share of Securetech Corporation Consistently Sells at a Market