FCFE increases with an increase in net borrowings - as can be seen
from the formula given below: FCFE = CFO – FC Inv + Net borrowing.
Equity Investments MCQ - Equity Investments Section 2
- A FCFE is a measure of a firm’s expected dividends.
- B It can also be used for a non-dividend paying stock unlike DDM which requires the timing and the amount of the first dividend to be paid.
- C Not all of the available cash flow is distributed to shareholders because a company retains some part of it for future investments as a going concern.
FCFE is a measure of a firm’s dividend-paying capacity rather than
expected dividends.
FCFE model can be used if a stock pays a dividend, is expected to pay a
dividend, or is not expected to pay a dividend.
Using a financial calculator, calculate the present value as: FV = $20;
N = 10; PMT = 1; I/Y = 8%; CPT PV = $15.97 Since the intrinsic value is
less than the current market price, the preferred stock is overvalued.
