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Finance question please!!?


if a firm increases its dividend by taking on risky investment
what happens to the P/E ratio?
P/E=payout ratio/ r-g r:return g:growth rate

I say it doesn't change....

the P/E ratio is the market price of the firm divided by its Earnings per share. It's market based so if a firm increases its div. normally the P/E ratio would rise because it is a sign that the firms earnings will rise so you are willing to pay more for that investment (price rises). On the other hand, if the investors are aware of this 'risky' investment that could decrease the P/E ratio, because they're scared to loose their investment.

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