Question: Shares of firm A and firm B are traded on
Shares of firm A and firm B are traded on an efficient market. The two firms are similar in their operations, are of the same size and risk, and are growing rapidly. They both report the same net income. However, you see in the financial statement notes that firm A uses declining balance amortization for capital assets, while firm B uses straight- line amortization. Which firm’s shares should sell at the higher price– earnings ratio, all other things being equal? Explain.
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