CFA Practice Question
When using the P/E version of the Dividend Discount model, ______
II. a lower required return will give you a higher P/E ratio.
III. a higher payout ratio will give you a higher P/E ratio (assuming all else stays constant).
I. a lower growth rate will give you a lower P/E ratio.
II. a lower required return will give you a higher P/E ratio.
III. a higher payout ratio will give you a higher P/E ratio (assuming all else stays constant).
A. II and III.
B. I and III.
C. I, II and III.
Explanation: r = D1/P0 + g, and g = (1.0 - Payout rate) (ROE)
User Contributed Comments 4
| User | Comment |
|---|---|
| chandsingh | Correct me if iam wrong but iii is correct because the higher dividend payout will increase the numerator making up for any decrease in Growth? |
| acemaj | why is I true? |
| asalonga7 | Using the gordon growth model these answers arent hard to work through: Po = D1/ (k-g) 1 - lower growth means larger denominator = lower price 2 - lower required rate means smaller denom = higher price 3 - agree with chandsingh - payout ratio directly affects the numerator while it is being multiplied by another percentage in the denominator - more of an increase in D1 => higher numerator=higher price |
| forry9er | P/E = Payout rate / Rr - g |