Equity Investments - Equity Investments Section 2
76. Which of the following statements is most accurate? A firm’s free-cash-flowto-equity (FCFE):
- Option : B
- Explanation : FCFE increases with an increase in net borrowings - as can be seen from the formula given below: FCFE = CFO – FC Inv + Net borrowing.
78. Which of the following statements is incorrect about FCFE model?
- 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.
- Option : A
- Explanation : FCFE is a measure of a firm’s dividend-paying capacity rather than expected dividends.
79. With respect to FCFE model, which of the following statements is most accurate?
- Option : C
- Explanation : 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.
- Option : A
- Explanation : 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.
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