Kingpin804

All else equal, a firm will have a higher Price-to-Earnings (P/E) multiple if:

A) the stock’s beta is lower.

B) return on equity (ROE) is lower.

C) retention ratio is higher.

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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.

Kingpin804

Use the following data to analyze a stock's price earnings ratio (P/E ratio):

• The stock's beta is 1.2.
• The dividend payout ratio is 60%.
• The stock's expected growth rate is 7%.
• The risk free rate is 6% and the expected rate of return on the market is 13%.

Using the dividend discount model, the expected P/E ratio of the stock is closest to:

A) 5.4.

B) 8.1.

C) 10.0.

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k = ER = Rf + Beta(RM − Rf) = 0.06 + (1.2)(0.13 − 0.06) = 0.144
Dividend payout ratio = 0.60
P/E = div payout / (k − g) = 0.6 / (0.144 − 0.07) = 8.1

Kingpin804

A stock has a required rate of return of 15%, a constant growth rate of 10%, and a dividend payout ratio of 45%. The stock’s price-earnings ratio should be:

A) 9.0 times.

B) 4.5 times.

C) 3.0 times.

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P/E = D/E1/ (k - g)
D/E1 = Dividend Payout Ratio = 0.45
k = 0.15
g = 0.10
P/E = 0.45 / (0.15 - 0.10)
= 0.45 / 0.05 = 9