Series 79 practice questionhardP/E Ratio
If a company's share price and diluted share count remain constant, what is the effect of higher interest expense on its P/E ratio?
- AP/E increases because interest expense reduces EPS✓ Correct answer
- BP/E decreases because interest expense reduces EPS
- CP/E is unchanged because interest is excluded from net income
- DP/E becomes an enterprise-value multiple
Explanation
Why A — P/E increases because interest expense reduces EPS
P/E equals price per share divided by EPS. With price and shares constant, higher interest expense reduces net income and EPS, making the P/E ratio increase, not decrease.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 995+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Collection, Analysis & Evaluation of Data questions
- A credit agreement requires a minimum EBITDA/interest coverage ratio of 3.5x. In the most recent fiscal year, the…
- When using EV/EBITDA multiples for valuation, which of the following adjustments is most appropriate for a company with…
- An investment banker is valuing a private company using public comparables. If the private company has a lower EBITDA…
- A firm has an enterprise value of $2 billion, total debt of $600 million, cash of $100 million, and equity of $1.2…
- According to the DuPont equation, which of the following would increase ROE if net income and sales are unchanged, but…
- A company's current ratio is 1.0, and its quick ratio is 0.5. What does this suggest about its inventory levels…
- When performing financial due diligence in an M&A transaction, which of the following is MOST commonly reviewed to…
- If a company increases its net income but its stock price remains constant, what happens to its P/E ratio?