P/E ratio question

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newsuper

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Found this question:
Assuming all other variable remain unchanged, which of the following would increase a firm’s P/E ratio?
A. The level of inflation is expected to decline
B. The yield on T-Bills increases
C. Investors become more risk averse
D. The dividend payout ratio decreases
The provided answer is……
D
But, I don’t get it:
based on P/E = (D/E)/k-g
a dividend payout ratio decrease means a decrease in (D/E) and also an increase in g (as g = Retention Ratio (now bigger) X ROE
So you have a smaller denominator and a smaller numerator..right? so why would your P/E ratio increase?
Thanks
 
Dividend payout ratio decreases if company is a growth company. That means more part of it Earning is going to increase revenue rather than paying out dividend.
For Growth company , actually we can’t apply D/k-g as Price of the stocks as there is a possibility of no or variable Dividend pay out which is not increasing at constant rate. So please do not consider
P/E=(D/E)/(k-g) equation in mind to understand relationship between D and P
 
what equation is D/E /k-g?
Infation increase may reduce the P/E depending on the company’s passthrough capability
Increase in Treasury yields should increase the costs of equity and thus reduce the P/E ratio
If investors become risk averse, it means they buy more of fixed income securities, and sell shares, thus reducing the P/E ratios
If the divident payout ratio increases, it means your payout ratio is higher and the P/E ratio also increases.
remember P = Div1/(k-g) which is
P= (EPS* Payout ratio)/(k-g) and therefore we divide both sides by EPS to get the P/E ratio which is
P/E = Payout Ratio/(k-g)
Hope my two cents helps.
 
Well it must be just a rubbish question.
Point 1 - The payout ratio can’t change without affecting the retention ratio
Point 2 - A decrease in the payout ratio (ignoring Point 1) will result in a lower PE, not higgher as asked for in the question.
 
The denominator will be much smaller on a percentage basis, so PE increases.
 
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