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Basic Question 1 of 2

The P/CF ratio is negatively related to ______.

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
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You have a wonderful website and definitely should take some credit for your members' outstanding grades.
Colin Sampaleanu

Colin Sampaleanu

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.