Assuming that other things are constant, the price earnings (P/E) ratio:
A)is higher for firms with high growth prospects and lower for riskier firms.
B)is lower for firms with high growth prospects and higher for riskier firms.
C)is not affected by the growth prospects of a firm.
D)is equal to the market price of the share of a firm.
E)is equal to the earnings per share of a firm.

Question

Quizplus · Accepted Answer

The P/E ratio is typically higher for firms with high growth prospects because investors are willing to pay more for the future earnings growth. Conversely, riskier firms often have lower P/E ratios as investors are less willing to pay for uncertain future earnings.

Assuming That Other Things Are Constant, the Price Earnings (P/E)