- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 23. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to Earnings: Valuation Based on Forecasted Fundamentals
CFA Practice Question
The trailing P/E ratio will increase if the ______ increases.
II. earnings retention ratio
III. required rate of return
IV. earnings growth rate
I. dividend payout ratio
II. earnings retention ratio
III. required rate of return
IV. earnings growth rate
Correct Answer: I and IV
Trailing P/E = (1 - b) (1 + g) / (r - g). Note that b is the earnings retention ratio, not the payout ratio ( 1- b).
User Contributed Comments 2
| User | Comment |
|---|---|
| ssradja | be aware that II has affect on g too. g = ROE*b. So, it may or may not increase the P/E. |
| Phlipsen | vey good comment ssradja! |