Laura is considering two investments: Stock A and B. Both stocks have a P/E ratio of 19. Stock A has an expected growth rate of 5 percent and stock B has an expected growth rate of 13 percent. Which is the better stock and why?
A) Stock B is better because it is considered to be cheaper than Stock A.
B) Stock A is better because it is expected to grow at a slower rate and therefore will be less risky than Stock B.
C) Since the P/E ratios are the same, Laura would be indifferent between the two stocks.
D) None of these choices are correct.

Question

Quizplus · Accepted Answer

Stock B is better because a higher expected growth rate (13 percent compared to 5 percent) suggests a greater potential for future earnings, making it more attractive despite both stocks having the same P/E ratio.

Laura Is Considering Two Investments: Stock a and B