McDonald's shares currently sell for $103 per share.Its expected earnings per share are $5.50.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,its share price would

Question

Quizplus · Accepted Answer

To calculate the expected share price based on the P/E ratio, we multiply the expected earnings per share by the industry average P/E ratio:

Expected share price = Expected earnings per share x P/E ratio 
Expected share price = $5.50 x 24 
Expected share price = $132

Since the expected share price based on the industry average P/E ratio is higher than the current share price of $103, the stock is expected to rise. Therefore, the answer is B.

McDonald's Shares Currently Sell for $103 Per Share