The risk for growth investors is that the expected earnings growth does not occur. How will this low growth affect the price-multiple and stock prices, respectively? A) Increase; decrease. B) Decrease; increase. C) Decrease; decrease.
B How you doing honey?
A I think earnings wil decrease more than price!!
A If the expected earnings growth doesnt happens then price to earning ratio will increase and the growth investors will sell the stock bringing the stock price under pressure.
C
A
I gotta go with C as well.
I think C.
cfaboston28 Wrote: ------------------------------------------------------- > B > > How you doing honey? No honey. It is C. Because, low earning imply low stock price. Let face you buy looser company stock. Right? Second, low growth implies bigger denominator, therefore, reduce price. same thing again.
C for me too a high P/E is no longer justified because of lack of enough growth, so price will go down.
I also had C, sugar.
C it is 
There…aren’t you all feeling much better now!! wish we’d see more of these on the actual exam day!
mumukada Wrote: ------------------------------------------------------- > C it is > > There…aren’t you all feeling much better now!! > > > wish we’d see more of these on the actual exam > day! A’int gonna happen. Don’t full yourself. This is not L1. Even there were some CFAI , will make you, you and you don’t get it:)
I don’t exactly undestand tibwa’s explanation. If the mult is P/E, then answer C implies that price has to drop more than the earnings to have the overall multiple drop. Why is that?
P/E = D/E / (k-g) so if the growth expectations are lower then, P/E will automatically be lower because the price multiple declines - but growth investors look for high price multiples - this isn’t attractive anymore - so the stock price will also decline.
Thanks.
C Suckas.
mwvt9 Wrote: ------------------------------------------------------- > I don’t exactly undestand tibwa’s explanation. > > If the mult is P/E, then answer C implies that > price has to drop more than the earnings to have > the overall multiple drop. Why is that? Don’t try to understand because i don’t fuck*ing speak english,but let try this. P= D1/r-g. So if r low, you get higher denomitor therfore, lower P. And lower P implies Lopwer P/E Or P/E= D1/r-g/E1 = D1/r-g*1/E. Your p is already low. You will not buy a stock of a company that is not making money unless you are a contrarian or some value addict sh*t
Good use of math and swearing to overcome language barrier.
Why use math. Its pretty intuitive. A growth investor is looking for a company that has high earnings growth. This typically leads him to invest in high P/E stocks. Once the earning growth doesn’t materialize, then the price of the stock will get hit. Also, investors are no longer willing to pay a high premium for a “growth” company than isn’t experiencing high growth. I don’t buy companies that don’t make money. (See tech-boom shit)