To Justify a High P/E Ratio, the Market Must Believe

question 25

Multiple Choice

To justify a high P/E ratio, the market must believe one of the following about a firm:

• A)It has low growth opportunities
• B)It will have constant dividends forever
• C)It has high growth opportunities
• D)It will use low depreciation to increase earnings

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Definitions:

Improvement In Technology

Enhancements or advancements in technology that increase productivity or efficiency, often leading to economic growth.

Annuity Due

An annuity for which the payments are made at the beginning of each period, as opposed to the end in a regular annuity.

Ordinary Annuity

A series of equal payments made at regular intervals, with the distinguishing characteristic that payments are made at the end of each period.

Present Value

Today's value of money or cash flows to be received in the future, determined by applying a given rate of return.