Question

A price-to-earnings (PE) ratio identifies how much investors are currently willing to pay for each $1 of earnings a firm produces. All else constant, a PE ratio will increase when which factors below increase?

Check all that apply.

a.payout ratio

b.retention ratio

c.required return

d.earnings growth rate

Answer 1

Answer:- Option a:- payout ratio and Option d:-earnings growth rate

Explanation:-

P/E = Dividend Payout Ratio / R – G

where;

R = Required Rate of Return

G = Sustainable Growth Rate

So, P/E Ratio will increase if Payout Ratio will increase as increase in the numerator will increase the P/E ratio.

and P/E Ratio will also increase if Growth Rate will increase as increase in the growth rate will decrease the denominator and lead to overall increase in the P/E Ratio.