Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12 percent?
A)A firm with PVGO = $0
B)A firm with investment opportunities yielding 10 percent
C)A firm with investment opportunities yielding 15 percent
D)All of the above firms represent growth stocks.

Question

Quizplus · Accepted Answer

A growth stock is a stock of a company that is expected to grow at an above-average rate relative to the market. The company with investment opportunities yielding 15 percent represents a growth stock as it has potential projects that can generate higher returns than the required return of 12 percent. The other options do not represent growth stocks as the firm with PVGO = $0 does not have any growth opportunities, and the firm with investment opportunities yielding 10 percent represents a firm with average growth prospects.

Which of the Following Situations Accurately Describes a Growth Stock