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**CFA Practice Question**

The P/CF ratio will increase if the ______ increases.

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

A. II only

B. I and II

C. II and III

**Explanation:**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**
4

User |
Comment |
---|---|

danlan2 |
P/CF is not related to dividend |

ThePessimist |
P/CF is related to the dividend in the sense that g=b*ROE. If the dividend payout ratio goes up, b goes down, so P/CF goes down. |

Hishy |
ROE = 11% r = 10% b = 0.5 P/CF = (1+ROE*b)/(r-ROE*b) P/CF = 23.44 If b = 0.4 (i.e. div. payout increases) Then P/CF = 18.64 So am I wrong? |

Cfrey |
yes you are wrong. g= growth rate of CFs in this context, not growth rate of Dividends/Earnings |