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 the firm.
D) is equal to the market price of the share of the firm.
E) is equal to the earnings per share of the 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 future earnings. Conversely, it is lower for riskier firms due to the uncertainty of future earnings.

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