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.
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
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.