Why is it that when the retention ratio goes down P/E goes down as well? Isnt P/E= (D/E)/k-g and g=RRxROE. Greater g should be greater P/E. So just like P/E goes up when ROE goes up, shouldnt P/E go UP when RR goes up? Any help? Thanks
Because, D also goes up when the retention ratio goes down. So you have to check which side of the fraction has the stronger effect.