- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to earnings: valuation based on forecasted fundamentals

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**CFA Practice Question**

The leading 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

A. I and IV

B. I and III

C. II and IV

**Explanation:**Leading P/E = (1 - b) / (r - g). Note that b is the earnings retention ratio, not the payout ratio ( 1 - b).

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**User Contributed Comments**
2

User |
Comment |
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mbuechs2 |
And g = ROE x retention rate. What if ROE is very high? It should be better to retain the earnings in this case, correct? |

cminor |
For these q's just plug em in the formula to see their effect (start with a base example like a payout ratio of .50, r of .10, g of .03 |