|Author||Topic: The earnings multiplier (P/E)|
|A company's ROE is greater its required ROE. P/E for that company 's stock is most likely to be positively related to the earning retension rate.
Pls kindly tell me why P/E is positively related to the earning retension rate
|I give it a try:
P/E = Payout ratio/(k-g) (1)
g = growth rate = (1 - dividend payout rate)*ROE
=> if the retention increases + ROE is greater than required => growth rate will increase => denominator of (1) will be smaller
=> P/E will be greater. So P/E is most likely to be positively related to the earning retention rate. You can plug in real number since it's easier to see phanthithutra