CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

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

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.

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
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