Question

Stockbridge Sprockets Inc. earned $2.25 per share last quarter, and $2.50 in the last quarter of 2019. Because of declining demand for sprockets, analysts’ consensus estimates for the company for this quarter are $1.90 per share. If the company’s actual earnings announcement is $2.00 per share, absent any other news, what could the price of the stock be expected to do following the announcement?

A. Go up

B. Go down

C. Go either up or down

D. Remain unchanged

E. There is nothing in the data provided that would cause the stock price to move

Answer 1

The correct answer is option A. Go up

The actual earnings was more than the analysts' estimate. It is a positive surprise to the market. So, the stock price goes up all else being equal.

Option B is incorrect because the stock price goes up, not down

Option C is incorrect because all else being equal, the stock price goes up

Option D is incorrect because the stock price does not remain unchanged, it goes up

Option E is incorrect because there is sufficient data to say that the stock price goes up when there is a positve surprise.