HuskyGrad2010

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

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

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

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

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Dividends and the FCFE are often different and dividends are used as a signal to the market not FCFE. Dividends viewed as sticky is the true statement.

HuskyGrad2010

If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) earnings before interest and taxes (EBIT).

B) net income plus non-cash charges plus after-tax interest.

C) net income plus after-tax interest.

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The answer is indicated by the definition of FCFF: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv. The relationship between net income and FCFF is indicated by: NI = EBIT (1 – tax rate) – Int (1 – tax rate).

HuskyGrad2010

If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) after-tax EBIT plus non-cash charges.

B) earnings before interest and taxes (EBIT).

C) net income plus after-tax interest.

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The answer is indicated by the definition of FCFF: FCFF = EBIT (1 – tax rate) + Dep – FCInv – WCInv, which assumes that depreciation is the only non-cash charge. Further: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv.

HuskyGrad2010

Assuming that the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by net income if:

A) non-cash charges and interest charges are zero.

B) earnings before interest and taxes (EBIT) equals depreciation.

C) non-cash charges and interest charges are equal.

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The answer is shown by the relationship between FCFF and net income: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv. Further: FCFF = EBIT (1 – tax rate) + Dep – FCInv – WCInv, which assumes that depreciation is the only non-cash charge.

HuskyGrad2010

The three-stage FCFE model might result in an extremely high value if:

A) the growth rate in the stable-period is equal to that of GNP.

B) the growth rate in the stable-period is too high.

C) the growth rate in the stable-period is too low.

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If the growth rate in the stable-period is too high or the high-growth and transition periods are too long, the three-stage FCFE model might result in an extremely high value.

HuskyGrad2010

The two-stage FCFE model is suitable for valuing firms that:

A) are in an industry with significant barriers to entry.

B) have very high but declining growth rate in the initial stage.

C) have moderate growth in the initial phase that declines gradually to a stable rate.

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The two-stage FCFE model is suitable for valuing firms in industries with significant barriers to entry. Where these are present it is possible for the firm to maintain a high growth rate during an initial phase of low competition, and that the rate will drop sharply to a normalized rate when competition ultimately appears.

HuskyGrad2010

The stable-growth free cash flow to equity (FCFE) model is best suited for which of the following types of companies? Companies:

A) growing at a rate similar or less than the nominal growth rate of the economy.

B) with patents that will not expire for 20 or more years.

C) with significant barriers to entry.

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Companies growing at a rate similar to or less than the nominal growth rate of the economy are best suited for the Stable Growth FCFE Model. The three-stage FCFE model is most suited to analyzing firms currently experiencing high growth that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level. The two-stage model is best suited to analyzing firms in a high growth phase that will maintain that growth for a specific period, such as firms with patents or firms in an industry with significant barriers to entry.

HuskyGrad2010

Which of the following free cash flow to the firm (FCFF) models is most suited to analyze firms that are growing at a faster rate than the overall economy?

A) High growth FCFF model.

B) Two-stage FCFF model.

C) No growth FCFF model.

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The two-stage FCFF model is most suited for analyzing firms growing at a rate faster than the overall economy. The two-stage model assumes a high rate of growth for an initial period, followed by an immediate jump to a constant, stable growth rate.

HuskyGrad2010

Which of the following free cash flow to equity (FCFE) models is most suited to analyze firms in an industry with significant barriers to entry?

A) Two-stage FCFE Model.

B) FCFE Perpetuity Model.

C) Stable Growth FCFE Model.

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The two-stage FCFE model is most suited for analyzing firms in high growth that will maintain that growth for a specific period, such as firms with patents or firms in an industry with significant barriers to entry.

HuskyGrad2010

Which of the following free cash flow to equity (FCFE) models is most suited to analyze firms in an industry with significant barriers to entry?

A) Two-stage FCFE Model.

B) FCFE Perpetuity Model.

C) Stable Growth FCFE Model.

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The two-stage FCFE model is most suited for analyzing firms in high growth that will maintain that growth for a specific period, such as firms with patents or firms in an industry with significant barriers to entry.