QUESTIONS 79 THROUGH 90 RELATE TO EQUITY INVESTMENTS

88. An analyst collects the following data on the return on equity (ROE) and the payout ratio for two companies, M and N. Using a required return of 12.4% for both companies, she computes the justified forward P/E ratios, which are also given below. Company Return on equity (%) Payout ratio (%) Justified forward P/EM 12.0 30 7.5N 14.0 40 10.0If Company M increases its dividend payout ratio to 40% and Company N decreases its dividend payout ratio to 30%, which of the following will most likely occur? The justified P/E ratio of: A. both companies would increase. B. both companies would decrease. C. Company M would increase but that of Company N would decrease.