A company issues a surprise dividend using excess cash. What happens to its intrinsic P/E ratio?

Question

IBPrep · Accepted Answer

P/E decreases (earnings yield increases). Cash is the lowest-return asset on the balance sheet; removing it from the firm raises the average return on the remaining assets, which the market should value at a HIGHER yield (= lower P/E).

A company issues a surprise dividend using excess cash. What happens to its intrinsic P/E ratio?

Answer

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