CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

The P/BV ratio is negatively related to ______.

I. dividend payout ratio
II. return on equity
III. required rate of return
IV. earnings growth rate
A. I and III
B. II and IV
C. III only
Explanation: P/BV = (ROE - g) / (r - g). Empirical studies have also proved a strong positive relationship between the company's long-term growth and its P/B multiple but the relationship is not indicated by the equation.

User Contributed Comments 8

User Comment
turtle the higher dividend payout ratio the lower g;
the lower g the lower P/B
P/B = 1+(ROE-r)/(r-g)
so dividend payout is negatively correlated with P/B.
art1997 P/B =(ROE-g)/(r-g) or
P/B =ROE(1-b)/(r-g) => P/B and (1-b) ( dividend pay out ratio) are positively correlated at least
from first point of view. Of course (r-g) also have connection to dividend pay out ratio... But think this way: if dividend big, book value get smaller and P/D get bigger...
danlan2 We suppose ROE>=r and r>=g in order to get what turtle said
gradyb Wait, turtle: ROE = growth/(1-payout ratio). So, if dividend payout ratio increases, ROE increases and therefore P/B increases. No clear relationship exists between P/B and payout ratio.
tim2 I agree with gradyb - if a company makes a given profit, how the decision of wether to pay it out as dividends or retaina it affects the stock price is unclear - it may depend on the tax preference of the investors.
Hishy P/B = (ROE - g)/(r - g)
= 1+ (ROE-r)/(r-g)
g = ROE*b

So would b negatively affect P/B?
Hishy Just did a rough example.
Say ROE = 10%
r = 11%
b = 0.5

Therefore P/B = 0.833333
But if you increase b to 0.6, then P/B = 0.8.
So if g = ROE*b, then b and P/B are inversely related.
somk Hishy, u exactly proved the opposite. b is the retention ration, not payout ratio. the question asks about (1-b), not b. these sets of questions r too stupid if they just relate to payout ratio. try examples where ROE is greater than r, and examples where it's less and see for yoursleves.
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