Firm a Is High-Risk, and Firm B Is Low-Risk

question 25

Multiple Choice

Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

• A) Firm A
• B) Firm B
• C) Both would have the same P/E if they were in the same industry.
• D) There is not necessarily any linkage between risk and P/E ratios.

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Definitions:

Internal Reporting

The process of preparing and presenting financial and operational information to management and other internal stakeholders to assist in decision-making and performance evaluation.

GAAP Reporting

The standard framework of guidelines for financial accounting that includes the details, complexities, and legalities of business and corporate accounting. GAAP stands for Generally Accepted Accounting Principles.

LIFO Reserve

The difference between the cost of inventory calculated using the Last In, First Out method and the First In, First Out method, reflecting the impact of inflation on inventory valuation.

Balance Sheet

A summary document detailing a firm's assets, liabilities, and equity held by shareholders at a certain moment.