In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:
A)is greater than its required rate of return.
B)is less than its required rate of return.
C)equals its required rate of return.
D)will be lower than the industry average.

Question

Quizplus · Accepted Answer

If a firm has positive present value of growth opportunities, it means that its expected future earnings are greater than its current earnings. This expectation of higher earnings in the future will increase the demand for the stock and therefore its price. As a result, the price-earnings ratio (P/E) of the firm will be higher than the required rate of return (r). This is because investors are willing to pay a higher price for the stock in anticipation of higher earnings growth. Therefore, option A is the correct answer.

In General, If a Firm Has Positive Present Value of Growth