McDonald's stock currently sells for $123. It's expected earnings per share are $5.12. The average P/E ratio for the industry is 24. 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

The correct answer is A.The P/E ratio is a measure of how much investors are willing to pay for a share of a company's stock relative to its earnings per share. The average P/E ratio for the industry is 24, which means that investors are willing to pay $24 for every $1 of earnings per share. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, then they would be willing to pay the same P/E ratio for McDonald's stock. This means that McDonald's stock price would stay about the same.

McDonald's Stock Currently Sells for $123