Asked by Brittany Shackelford on Jun 04, 2024
Verified
If a firm increases its plowback ratio, this will probably result in ________ P/E ratio.
A) a higher
B) a lower
C) an unchanged
D) The answer cannot be determined from the information given.
Plowback Ratio
The proportion of earnings retained by a company after dividends are paid, often used for reinvestment in the business or to pay down debt.
P/E Ratio
Price-to-Earnings Ratio, a valuation metric that compares a company's stock price to its per-share earnings.
- Study the effects of dividend policy variations on the worth of shareholdings and the income of investors.
Verified Answer
LM
lauren makelyJun 11, 2024
Final Answer :
D
Explanation :
The plowback ratio (or retention ratio) reflects the proportion of earnings a company retains and reinvests in its operations rather than distributing as dividends. The impact on the P/E ratio from changing the plowback ratio depends on various factors, including how effectively the reinvested earnings generate future growth. Without information on the expected return on reinvested earnings, the effect on the P/E ratio cannot be determined.
Learning Objectives
- Study the effects of dividend policy variations on the worth of shareholdings and the income of investors.