Investors Are Willing to Purchase Stocks Having High P/E Ratios

question 19

Multiple Choice

Investors are willing to purchase stocks having high P/E ratios because:

• A) they expect these shares to sell for a lower price.
• B) they expect these shares to offer higher dividend payments.
• C) these shares are accompanied by guaranteed earnings.
• D) they expect these shares to have greater growth opportunities.

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Definitions:

Natural Monopoly

A market structure where a single firm can produce the entire market's supply at a lower cost than could multiple firms due to economies of scale.

Economies of Scale

Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced.

Elastic

A characteristic of a demand or supply curve that indicates a high sensitivity to changes in price.

Price Ceiling

A legally imposed maximum price on a good or service, typically set below the market equilibrium, leading to shortages.