If a firm increases its plowback ratio, this will probably result in ________ P/E ratio.

Question

Quizplus · Accepted Answer

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.

If a Firm Increases Its Plowback Ratio, This Will Probably