Other things being equal,a value firm compared with a growth firm will have:

A) higher cost of capital
B) lower growth rate on assets
C) lower profitability
D) all of these choices

Question

Other things being equal,a value firm compared with a growth firm will have:

A) higher cost of capital
B) lower growth rate on assets
C) lower profitability
D) all of these choices

Quizplus · Accepted Answer

The higher the cost of equity capital,the greater the 'riskiness' of the firm's equity,which in turn implies a higher book-to-market ratio.Thus,in general,we expect value firms to be of higher risk than growth firms.The higher the level of expected growth,the lower the book-to-market ratio.Thus,in general,we expect growth firms,as their name suggests,to have higher expected growth rates than value firms.The higher the level of r,the lower the book-to-market ratio.Thus,in general,we expect growth firms to have higher levels of expected profitability than value firms.Therefore,to summarise,growth shares are of lower risk,have higher growth expectations and have higher levels of expected profitability than value firms.

Other Things Being Equal,a Value Firm Compared with a Growth