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

A positive present value of growth opportunities indicates that the firm is expected to generate more earnings in the future, which increases its expected stock price. Thus, investors are willing to pay a higher price for the stock, resulting in a higher price-earnings ratio than the required rate of return.

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