Question #52
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 18
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
The net impact of an increase in payout ratio on price-to-book value (PBV) ratio cannot be determined because it might also:
Answer Choices:
A. decrease required rate of return
B. decrease expected growth
C. decrease the market value of the firm
Explanation
If payout increases, the growth of the firm may slow down, because internally generated
funds are not being invested in new, profitable projects. Hence, the net impact on the PBV
ratio from change in payout ratio cannot be determined.