According to the price/earnings approach to stock valuation, if the dividend growth rate is expected to drop or if the required return goes up, the net effect is a
A) higher P/E ratio.
B) lower P/E ratio.
C) higher stock price.
D) higher retention rate.

Question

Quizplus · Accepted Answer

The price/earnings ratio (P/E ratio) is calculated as the price per share divided by the earnings per share. If the dividend growth rate is expected to drop or if the required return goes up, investors will likely perceive the stock as being riskier and demand a higher rate of return. This means they will be willing to pay less for each dollar of earnings, leading to a lower P/E ratio.

According to the Price/earnings Approach to Stock Valuation, If the Dividend