# 30sec question

All other things being equal, which of the following would cause a stock’s P/E ratio to rise? A) A decrease in the payout rate B) A decrease in inflation C) A reduction in the firm’s return on equity D) An increase in the market risk premium

P/E = (div. payout rate)/(k-g) A) numerator goes down -> wrong B) required return goes down -> possible C) growth rate goes down -> denominator goes up -> wrong D) required return goes up -> wrong B

Good supersharpshoorter! You like this 30sec question…dont you!?!

I wish they were all like this ;’(

I wish the same

i guess it should be A A decrease in the payout rate this will decrease numerator it also affects denominator also. apply simple algebra u ll get A. ny thoughts cheers abhi

As the other post, choosing A will depend on some conditions. But i think B will be more guaranteed? abhisheksg Wrote: ------------------------------------------------------- > i guess it should be A > A decrease in the payout rate > this will decrease numerator it also affects > denominator also. > apply simple algebra u ll get A. > > ny thoughts > > cheers > abhi

Correct answer is B. Guys it is be because if inflation increase, the required return (denominator) goes down.

B = ANSWER PEs expand when inflation tames. Plain, simple rule of thumb. Happens every day in the markets