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Basic Question 1 of 2
The P/CF ratio is negatively related to ______.
II. future growth rate of cash flows
III. required rate of return
I. dividend payout ratio
II. future growth rate of cash flows
III. required rate of return
User Contributed Comments 3
| User | Comment |
|---|---|
| guipo | g = RR X ROE with RR = 1 - PO so I would say that as P/CF is positively related to g and g is negativeley related to PO then P/CF is negatively related to PO... Correct? |
| NIKKIZ | Guipo - that's what I thought too... |
| davidt876 | completely agree guipo. even the P/E formula from earlier: P0/E0 = (1-b)(1+g)/(r-g) where b is retention ratio... suggests P/E has a positive relationship with the payout ratio - but that makes 0 sense when you consider the knock on effect on growth. it can maybe impact the short term P/E, where income hungry investors bid up a stock's price on news of a 'higher than expected' payout.. but then on the XD the value of the distribution should drop right back out of the price. i personally think these equations are a load of it. the notes even mention that they fail in empirical tests |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2024 Level II Curriculum, Volume 4, Module 25.