Other things held constant, P/E ratios are higher for firms with high growth prospects.At the same time, P/E's are lower for riskier firms, other things held constant.These two factors, growth prospects and riskiness, may either be offsetting or reinforcing as P/E determinants.

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Quizplus · Accepted Answer

This statement is true. Higher growth prospects generally lead to higher P/E ratios because investors are willing to pay more for future earnings potential. On the other hand, riskier firms typically have lower P/E ratios because investors require a higher return to compensate for the increased risk. These two factors can have offsetting effects, meaning firms with high growth prospects but also high risk may have P/E ratios that are not significantly different from firms with lower growth prospects but lower risk. However, in some cases, high growth prospects and high risk may reinforce each other, leading to even higher P/E ratios for certain firms.

Other Things Held Constant, P/E Ratios Are Higher for Firms