The net impact of an increase in payout ratio on price-to-book value (PBV) ratio cannot be determined because it might also: A) decrease required rate of return. B) increase retention ratio. C) decrease the market value of the firm. D) decrease expected growth.
quick look suggests D… denominator = r - g = r - b*ROE… ok, now i’m confused too, but pretty sure that’s right. get confused on what b is (payout vs. retention)
I think answer is D. Because p/B ratio = ROE -g / r-g. And g=(1-payout ratio)*ROE. g will decrease and will decrease both numerator and denominator . Therefore impact uncertain.
analyst 76… don’t the numerator and denominator both go up… i agree it’s D though.
Yes both will go up but will not be certain by how much relative to each other. Because u are not told what is ROE and r. Of course for a well run company ROE>r but not always the case. ROE could be less than r…and they will yield different results.
D for the same reasons above
Hop on the bandwagon - D
D because everything depends on ROE and required rate of return.
D - because payout affects growth
D
I would go with D as well.
I agree with the fact that the g is in both denominator and numerator, but why would it cause us to be unable to find the net impact ? I mean it is just a matter of plug and chug right with the new values right? Anyway, i think i will go against the flow here and say A. (though I think the question is a little ambiguous)
It must be D even if it is ambiguous, the other 3 options are just plain wrong. Required rate of return comes from CAPM which is not effected by retention ratio.
Even though I am out of touch with the curriculam but dude this gotta be D.
D.
It isn’t B or C. But in answer choice A, doesn’t one of the theories say that increasing the dividend can lower the required rate of return (less uncertainty), which also effects the price to book ratio. However, if I had to choose amongst A or D, i would say D.
I pick A.
Answer?
sv102307 Wrote: ------------------------------------------------------- > I agree with the fact that the g is in both > denominator and numerator, but why would it cause > us to be unable to find the net impact ? I mean it > is just a matter of plug and chug right with the > new values right? > Anyway, i think i will go against the flow here > and say A. (though I think the question is a > little ambiguous) i think they’re saying that if the payout ratio goes up… but i admit it isn’t that clear and i certainly am a big champion of pointing out how many questions are badly worded… i don’t understand, i don’t remember multiple choice being that badly worded in school. but schweser/CFA seem to have a problem with it for some reason.
Whats the answer to this question?