LOS c: Contrast the ownership perspective implicit in the FCFE approach to the ownership perspective implicit in the dividend discount approach.

Q1. The ownership perspective implicit in the dividend valuation approach is of:

A)   control.

B)   a preferred stockholder.

C)   a common stockholder.

Q2. The ownership perspective implicit in the free cash flow to equity valuation approach is of:

A)   control.

B)   a preferred stockholder.

C)   a minority position.

Q3. A control perspective is most consistent with which of the following valuation approaches?

A)   Free cash flow (FCF).

B)   Dividends.

C)   Price to enterprise value.

LOS c: Contrast the ownership perspective implicit in the FCFE approach to the ownership perspective implicit in the dividend discount approach. fficeffice" />

Q1. The ownership perspective implicit in the dividend valuation approach is of:

A)   control.

B)   a preferred stockholder.

C)   a common stockholder.

Correct answer is C)

Dividends are most relevant to the stockholders who receive them and who have little control over their amount.

Q2. The ownership perspective implicit in the free cash flow to equity valuation approach is of:

A)   control.

B)   a preferred stockholder.

C)   a minority position.

Correct answer is A)

Dividend policy can be changed by the buyer of a firm. Thus, the free cash flow perspective looks to the source of dividends in a position of control rather than directly at dividends.

Q3. A control perspective is most consistent with which of the following valuation approaches?

A)   Free cash flow (FCF).

B)   Dividends.

C)   Price to enterprise value.

Correct answer is A)

Dividend policy can be changed by the buyer of a firm. Thus, the FCF perspective looks to the source of dividends in a position of control rather than directly at dividends. The price to enterprise value approach does not focus on cash flows.

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