 # P/E

All else equal, a firm will have a higher Price-to-Earnings (P/E) multiple if: A) retention ratio is higher. B) risk-free rate is higher. C) the stock’s beta is lower. D) return on equity (ROE) is lower.

Looks like B.

C. Beta lower -> cost of equity lower -> P/E = D/E / (ke - g). So P/E will be higher.

hmm… let me think

I think it’s A.

Its C.

if retention ratio is higher, you’d have higher PE. as higher G will lower your cost of capital.

I say A.

That was my thought pepp.

C K will decrease, decreasing the difference between k-g which increases the stocks price

c

Pepp, if your RR is higher it would leave a lower Div payout ratio. Lower div payout = Lower PE

Lower beta and risk free rate are good choices, but they depend on each other.

im going with B

Your answer: A was incorrect. The correct answer was C) the stock’s beta is lower. 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. I got confused.

ouch. this is a tricky question. Lower beta would tehn definitely give you a lower K.

I take it back and go for A.

Wow, you really have to equation jump there.

pepp Wrote: ------------------------------------------------------- > if retention ratio is higher, you’d have higher > PE. as higher G will lower your cost of capital. If your retention ration is higher, yes G will be lower, but remember the dividend payout ration will be lower. Thus the nominator will decrease. I did this question before, and if you put the numbers you’ll find out that increasing RR actually decrease P/E.

yeah, learnt the hard way. When two variables are moving, its always gets tricky to predict which one will have a greater effect. i am done. someone shoot me.