土豆妮

An increase in return on equity (ROE) will cause a price-to-earnings (P/E) multiple to:

A) increase.

B) there is insufficient information to tell.

C) decrease.

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An increase in ROE will increase growth through the g = (ROE × retention) relation. Thus, as growth increases, the following expression for trailing P/E should increase:

P₀/E₀ = [(1 – b)(1 + g)] / (r – g)

Note that the reading does not allow for any interactive relationship between leverage, ROE, and growth. Thus, no explicit consideration is given to whether the increase in ROE results from risk-increasing leverage that could cause an offsetting increase in the required rate of return.

土豆妮

An increase in profit margin will cause a price-to-sales (P/S) multiple to increase if:

A) the required rate of return increases.

B) the growth rate in sales does not decrease proportionately.

C) there is insufficient information to tell.

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An increase (decrease) in the profit margin increases (decreases) the growth rate if sales do not decrease (increase) proportionately. Increases in the required rate of return or leverage would decrease the P/S ratio. This is clear in the expression for trailing P/S:

P₀ / S₀ = [(E₀ / S₀)(1 – b)(1 + g)] / (r – g)