Reading 47: Free Cash Flow Valuation - LOS h ～ Q6-10

答案和详解如下：

6. what ways are dividends different from free cashflow to equity (FCFE)?

A)   There is no difference. Dividends must equal FCFE.

B)   Companies often use FCFE as a signal of positive future growth prospects while dividends are not used for signaling.

C)   Dividends are often viewed as "sticky." Mangers are reluctant to radically change the dividend payout policy while FCFE often has immense variability.

D)   Since issuing additional equity is cheap, firms can issue new shares if any future investment needs arise or increases in dividend payout are required.

The correct answer was C)

Dividends and the FCFE are often different, dividends are used as a signal to the market not FCFE, issuing additional equity is viewed as expensive not cheap for all firms. Dividends viewed as sticky is the true statement.

7.The repurchase of 20 percent of a firm’s outstanding common shares will cause free cash flow to the firm (FCFF) to:

A)   increase.

B)   remain the same.

C)   decrease.

D)   decrease or increase, depending on its circumstances.

The correct answer was B)

Share repurchases are a use of free cash flows, not a source. FCFF is cash flow that is available to all capital suppliers. Notice the conspicuous absence of repurchases in the following: FCFF = CFO + Int (1 – tax rate) – FCInv.

8. increase in financial leverage will cause free cash flow to equity (FCFE) to:

A)   decrease in the year the borrowing occurred.

B)   increase in the year the borrowing occurred.

C)   remain the same.

D)   decrease or increase, depending on its circumstances.

The correct answer was B)

An increase in financial leverage will increase net borrowing and, hence, increase FCFE in the year the borrowing occurred because: FCFE = FCFF – [interest expense] (1 – tax rate) + net borrowing.

9.The repayment of a significant amount of outstanding debt will cause free cash flow to equity (FCFE) to:

A)   increase.

B)   remain the same.

C)   decrease.

D)   decrease or increase, depending on its circumstances.

The correct answer was C)

Debt repayment will decrease net borrowing and, hence, decrease FCFE because: FCFE = FCFF – [interest expense] (1 – tax rate) + net borrowing.

10.Optimal capital structure is the mix of debt and equity that will maximize the value of the firm and minimize:

A)   interest expense.

B)   weighted average cost of equity.

C)   weighted average cost of capital.

D)   weighted average cost of debt.

The correct answer was C)

The optimal capital structure is the mix of debt and equity that will maximize the value of the firm and minimize the weighted average cost of capital (WACC).