Q16I

Expert-verifiedFound in: Page 437

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**Explain why the following statements are true/false/uncertain.**

**a. With all else held constant, a firm will have a higher P/E if its beta is higher.**

**b. P/E will tend to be higher when ROE is higher (assuming plowback is positive).**

**c. P/E will tend to be higher when the plowback rate is higher**.

a. False

b. True

c. Uncertain

Higher beta implies that the risk and discount code applied to cash flow is higher. In this case earnings, cash flow, and price of the firm will be lower. Hence the ratio of price to earnings will be lower. Therefore this statement is false.

Higher ROE would mean more valuable growth opportunities. Therefore this statement is true.

It depends on comparison of expected rate of return with market capitalization rate. In case the expected rate of return is higher than market capitalization rate, P/E will increase. Therefore this statement is uncertain.

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