Increase in dividend payout/reduction in earnings retention.In this case, an increase in the dividend payout will likely increase the P/E ratio because a decrease in earnings retention will likely increase the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of k_e and ROE. If the company is earning a lower rate on new projects than the rate required by the market (ROE < k_e), investors will likely prefer that the company pay out earnings rather than investing in lower-yield projects. Since an increase in the dividend payout would decrease earnings retention, the P/E ratio would rise, as investors will value the company higher if it retains a lower percentage of earnings.

Increase in ROE: ROE is a component of g. As g increases, the spread between k_e and g, or the P/E denominator, will decrease, and the P/E ratio will increase.

Increase in dividend payout/reduction in earnings retention. In this case, reduction in earnings retention will likely lower the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of k_e and ROE. If the company is earning a higher rate on new projects than the rate required by the market (ROE > k_e), investors will likely prefer that the company retain more earnings. Since an increase in the dividend payout would decrease earnings retention, the P/E ratio would fall, as investors will value the company lower if it retains a lower percentage of earnings.

Increase in g: As g increases, the spread between k_e and g, or the P/E denominator, will decrease, and the P/E ratio will increase.

According to the earnings multiplier model, the P/E ratio is equal to P₀/E₁ = (D₁/E₁)/(k_e - g). As D₁/E₁ increases, P₀/E₁ will increase, all else equal.