Company A and Company B have identical expected earnings potential but Company B has a higher price-earnings ratio.This discrepancy:
A)can be explained by the difference in share price.
B)can be explained by the fact that Company A pays more dividends.
C)can be explained by the fact that Company A is considered to be riskier than Company
D)cannot be explained.

Question

Quizplus · Accepted Answer

The higher price-earnings ratio of Company B suggests that investors are willing to pay more for each dollar of earnings compared to Company A. This indicates that investors perceive Company A as riskier than Company B, leading to a lower valuation.

Company a and Company B Have Identical Expected Earnings Potential