"Equity Investments": Concepts and Basic Tools

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Questions 1:

Which of the following statements is least accurate? A firm’s free cash flow to equity (FCFE):

A 、is a measure of the firm’s dividend-paying capacity.

B、 increases with an increase in the firm’s net borrowing.

C、 is significantly affected by the amount of dividends paid by the firm.

Questions 2:

An investor gathers the following data to estimate the intrinsic value of a company’s stock using the justified forward price-to-earnings ratio (P/E) approach.

Equity Investments: Concepts and Basic Tools

The intrinsic value per share is closest to:

A、 $36.

B 、$48.

C、 $72

View answer resolution

【Answer to question 1】C

【analysis】

C is correct. Dividends, a discretionary cash flow from financing activities, have no bearing on a firm’s free cash flow to equity, as can be seen from the formula: FCFE = CFO – FCInv + Net borrowing.

A is incorrect. FCFE is a measure of dividend-paying capacity.

B is incorrect. FCFE increases with an increase in the firm’s net borrowing.

【Answer to question 2】A

【analysis】

Equity Investments: Concepts and Basic Tools