CFA Practice Question

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CFA Practice Question

The leading P/E ratio will decrease if the ______ increases.

I. dividend payout ratio
II. earnings retention ratio
III. required rate of return
IV. earnings growth rate
A. I and IV
B. II and III
C. I and III
Explanation: Leading P/E = (1 - b) / (r - g). Note that b is the earnings retention ratio, not the payout ratio ( 1 - b).

User Contributed Comments 4

User Comment
tim2 So Berkshire Hathaway pays no dividends, so it's payout ratio is zero so it's PE should be zero. Sell sell!
(or regard the theory as a bit silly..)
malawyer if b increases, g increases also which has a LARGER impact, so II is wrong. Aint it?
chris76 tim2, no dividends means b=0 which does not give a PE of 0.

malawyer, I plugged in a few random numbers to check and got answers consistent with theirs
somk Chris76. no dividends means b=0? good luck in the exam.
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