Question

You are looking to value some common stock using various valuation models and are answering the following questions:

8. T/F a high PE ratio is not really justified if the growth rate of the company is below the industry average

9. T/F a company with a high growth rate will cause most valuation models to yield a higher stock price intrinsic value.

10. T/F the lower the required return should cause an investor to pay less for a stock.

Answer 1

8. TRUE

A high PE ratio is not really justified if the growth rate of the company is below the industry average. A high PE is justified only if the company has a higher growth rate than the industry average.

9. TRUE

A company with a high growth rate will cause most valuation models to yield a higher stock price intrinsic value. A company's growth rate is directly proportional to the intrinsic value of the stock. Higher the growth rate higher is the intrinsic value and vice versa.

10. FALSE

A lower required return should cause an investor to pay more for a stock because the stock is less riskier.