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**CFA Practice Question**

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

Correct Answer: III only

P/CF = (1 + g) / (r - g). Note that g is the expected growth rates of future cash flows.

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**User Contributed Comments**
3

User |
Comment |
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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 |