Risky firms have a higher risk-adjusted cost of capital.Which one of the following factors would contribute to that firm also having a high price/earnings ratio?

Question

Quizplus · Accepted Answer

Growth opportunities would contribute to a high price/earnings ratio, as investors are willing to pay a premium for the potential future growth of the firm. This is especially true for risky firms, as investors may see the potential for high returns if the growth opportunities are realized. High earnings per share (choice A) may be an indication of a stable, profitable firm, but it does not necessarily contribute to a high P/E ratio. Conversely, low earnings per share (choice B) would likely result in a low P/E ratio. Choice D is incorrect because high risk and high P/E ratio can occur simultaneously, as explained above.

Risky Firms Have a Higher Risk-Adjusted Cost of Capital