SOLUTION: The price-earning ratio (p/E)of a company is the ratio of the market value of one share of company's outstanding common stock to the earning per share.If P/E increse by 20%,determi

Question 156345: The price-earning ratio (p/E)of a company is the ratio of the market value of one share of company's outstanding common stock to the earning per share.If P/E increse by 20%,determine the percentage increse inthe market value per share of common stock

Answer by gonzo(654) (Show Source): You can put this solution on YOUR website!
if p/e = mv/eps and eps remains the same, then .....
(1.2 * mv)/eps = 1.2 * (mv/eps) = 1.2 * (p/e) since (p/e) = (mv/eps) by definition.
putting in numbers................
assume mv = 100 and eps = 10.
then p/e = 100/10 = 10.
1.2 * p/e = 1.2 * 10 = 12.
similarly mv = 100 so 1.2 * mv = 120.
mv / eps = 120 / 10 = 12 = p/e as calculated above.

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