P/E ratios are ______________ in the anticipated constant growth rate (g) for a constant growth stock. In other words, if investors revise their expectations so that "g&quo…

Question

P/E ratios are ______________ in the anticipated constant growth rate (g) for a constant growth stock. In other words, if investors revise their expectations so that "g" is higher for a stock than it used to be, the stock price should ____________.

a) Increasing, rise
b) Decreasing, fall
c) Unchanging, stay the same

Answer 1

P/E ratios are impacted by the anticipated constant growth rate (g) for a stock. If the growth rate 'g' is expected to be higher, the P/E ratio typically increases and the stock price is expected to rise due to revised investor expectations about the company's future prospects.

Step-by-step explanation:

The Price/Earnings (P/E) ratios are impacted by the anticipated constant growth rate (g) for a stock. If investors revise their expectations and perceive that 'g' is higher for a stock than it previously was, the P/E ratio is likely to increase, suggesting a higher valuation for the company's earnings. Consequently, the stock price should rise as the market adjusts to the new growth expectations.

The relationship between P/E ratios and stock prices is underpinned by the idea that stock prices are based on expectations about the future. A shift in investor expectations about a company's growth prospects can significantly influence the stock price. If the anticipated growth rate increases, this positive outlook generally leads to a rise in stock price, while downward revisions in growth expectations tend to lead to a decrease in stock price.