If the real interest rate is more or less constant and the growth rate of dividends falls sharply,the price-earning ratio would fall.

Question

Quizplus · Accepted Answer

The price-earnings ratio (P/E ratio) is calculated by dividing the market price per share by the earnings per share. If the growth rate of dividends falls sharply, it implies that the earnings of the company are not growing at a robust pace. As a result, the denominator of the P/E ratio (earnings per share) would fall, leading to a lower overall P/E ratio. However, if the real interest rate remains constant, it would not have a significant impact on the P/E ratio as it does not directly affect the earnings or the market price per share.  Therefore, the statement in the question is true.

If the Real Interest Rate Is More or Less Constant