I was doing an LOS quiz online for Schweser. In one of the quiz explanations, it says, “To increase P/E ratio, lower the retention ratio, lower k and or increase g. A lower beta would lead to a lower stock risk premium and a lower k.” This is based on P/E = (D/E)/(k-g). Wouldn’t lowering the retention ratio (RR) lower the P/E ratio?? g = RR x ROE, so lowering RR, lowers g, which make k-g larger, and P/E smaller. Anyone have thoughts? Thanks.
you want to reinvest as much as you can if ROE > k. therefore, lowering retention ratio increases P/E if ROE < k and decreases P/E if ROE > k
remember that Dividend Payout ratio = 1-RR so when considering the impact of changes in the retention ratio tp Price and P/E one must not forget the numerator often the driving factor is the increase in dividend of the numerator which trumps the lower g and expanding denominator. this is a common topic that has been discussed before, try a search
The only way this would decrease P/E is if ROE > 100%, which is quite unlikely.
Hey everyone. Thanks. It’s much clearer now.
wyantjs Wrote: ------------------------------------------------------- > The only way this would decrease P/E is if ROE > > 100%, which is quite unlikely. wrong