An increase in financial leverage, assuming no change in the growth rate, will generally cause a price to cash flow (P/CF) ratio to: A) increase. B) remain the same. C) decrease. D) there is insufficient information to tell.
C - Decrease Increase in leverage will increase r. P/CF = Profit Margin*DPR*(1+g)/r-g Increase in r will decrease P/CF.
A because the spread between r/ret and g decreases
Nib, whats DPR ? in the formula
I agree with A
Dividend Payout Rate
nib, that is the P/S formula if i’m not totally wrong… i’d go with b, but just guessing this one.
Niblita you’re thinking of price to sales aren’t you?
Crap, you’re right. I may just stop the studying for today. There isn’t a formula for P/CF right?
CF is just adjusted a little, but I don’t know of a formula.
CFx(1+g) / k-g edit: Obviously your choice of various cash flows though. Plus R/ret would be wacc for FCFF versus Required return on Equity for FCFE
P/CF is (1+g)/r-g. Can someone confirm this?
Which CF is being used in the denominator? FCFF, FCFE, CFO . . .
P/CF = market value / CF CF = adjusted CF, FCFE, EBITDA…
****Man I am going to fail this exam****** Edit for being an idiot.
Technically the formula for P/CF is Price/Operating Cash Flow, you are all thinking about “justified” formulas. My reasoning is that if you increase leverage(debt) interest expense will increase decreasing operating cash flow, thus increasing the ratio.
So if leverage increase, it could possibly be interest bearing and reduce CFO, so an increase in the ratio is possible? Edit: Lance thats what I was thinking (after my using the dead wrong formula was brought to my attention).
the question does not give any clue but I think we should assume its CFO?! I believe your earlier explanation is correct though.
What about the “net borrowing” factor in FCFE? Wouldn’t CF increase from the borrowing or are we only looking at CFO?