Session 8: Corporate Finance
Reading 31: Dividends and Share Repurchases: Analysis
LOS i: Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow
Grommetco produces plastic insulators for the electrical appliance industry. Excerpts from Grommetco’s financial results for 2010 are as follows:
| Net Income (earnings) |
$10 |
| Free Cash Flow to Equity |
$8 |
| Dividends Paid |
$1 |
| Stock Repurchases |
$3 |
Which of the following statements is most accurate? Grommetco’s:
|
A) |
FCFE coverage ratio is 2.0. | |
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B) |
dividend payout ratio is 0.4. | |
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C) |
dividend coverage ratio is 2.5. | |
Dividend coverage ratio = Net Income / Dividends = $10 / $1 = 10.
FCFE coverage ratio = FCFE / (dividends + share repurchases) = $8 / ($1 + $3) = 2.0.
Dividend payout ratio = Dividends / Net Income = $1 / $10 = 0.1.
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发表于 2011-3-10 15:11
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