Series 79 practice questionmediumP/E Ratio
If a company increases its net income but its stock price remains constant, what happens to its P/E ratio?
- AIt increases
- BIt decreases✓ Correct answer
- CIt stays the same
- DCannot be determined
Explanation
Why B — It decreases
P/E = Price/EPS; if the price is constant but EPS (net income per share) rises, the ratio decreases. A is incorrect because the denominator increases. C ignores the effect of rising earnings.
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