Other things equal,if the:
A)required rate of return increases,the P/E ratio will rise.
B)risk premium increases,the P/E ratio will rise.
C)risk-free rate rises,the P/E ratio will fall.
D)dividend payout increases,the P/E ratio will fall.

Question

Quizplus · Accepted Answer

The P/E ratio is calculated as the price per share divided by the earnings per share. As the risk-free rate increases, it raises the opportunity cost of investing in stocks, causing investors to demand a higher return. This results in the P/E ratio falling.

None of the other options are correct. A higher required rate of return or risk premium will reduce the P/E ratio, as investors will be less willing to pay a high price for a given level of earnings. A higher dividend payout ratio will increase the P/E ratio, as investors will be willing to pay more for a stock that pays a higher dividend.

Other Things Equal,if The