- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 25. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to Earnings: Valuation Based on Forecasted Fundamentals
CFA Practice Question
The leading P/E ratio will decrease if the ______ increases.
II. earnings retention ratio
III. required rate of return
IV. earnings growth rate
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. |