Discuss the relationship between growth stocks and income stocks and their P/E ratios
What will be an ideal response?
Answer: A growth stock is a company that is actively growing and expanding. This growth requires a lot of capital so they seldom pay much in dividends, if any. Instead they plow their earnings back into the growth of the company. A fast growing company leads to the potential for fast growing earnings per share. When the market thinks this growth company has good earnings growth, they bid the share price up accordingly representing higher P/E ratios.
Most income stocks are from companies who are relatively large and mature in their industries. Since they are not in an active growth mode, then they don't need to retain earnings and can instead pay them out to the shareholders in the form of high dividends. Because they are not expected to have a lot of growth in earnings, then the market does not bid up their market price resulting in relatively low P/E ratios.
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In 2018, Willow Corporation had three employees. Two of the employees worked full-time and earned salaries of $25,000 each. The third employee worked part-time and earned $4,000. The employer timely paid state unemployment tax equal to 5.4 percent of each employee's wages up to $7,000. How much unemployment tax was paid to the state from Willow Corporation for 2018?
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