Question

A firm with good investments and SCD/FCFE ratio greater than 1 should: I. Reduce cash distributions...

A firm with good investments and SCD/FCFE ratio greater than 1 should:

I. Reduce cash distributions
II. Increase investments
III. Build cash reserves

Select one:

A. I only

B. II only

C. III only

D. I and II only

E. II and III only

F. I, II, and III

If the firm's SCD/FCFE ratio is greater than 1, the firm is:

I. Paying out all of its free cash flow available to the common shareholders
II. Increasing its holdings of cash
III. Drawing down its existing cash balances

Select one:

A. I only

B. II only

C. III only

D. I and II only

E. I and III only

F. II and III only

How does the SCD/FCFE ratio differ from the dividend payout ratio?

I. Dividend payments are not included in the SCD/FCFE ratio
II. Stock repurchases are not included in the dividend payout ratio
III. The denominators for the two ratios are different, since earnings and FCFE are not identical

Select one:

A. I only

B. II only

C. III only

D. I and II only

E. II and III only

F. I, II, and III

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Homework Answers

Answer #1

Answer(1): A firm with good investments and SCD/FCFE ratio greater than 1 should "Build cash reserves". Option "3" is correct.

FCFE- It is free cash flow to equity thary is available to equity shareholders after paying all the expenditures and investment. So excess cash should be used in making reserve.

Answer(2): If the firm's SCD/FCFE ratio is greater than 1, the firm is,"Increasing its holdings of cash".

Option "2"is correct.

If the ratio is greater than 1, it means company has adequate cash.

Answer(3): How does the SCD/FCFE ratio differ from the dividend payout ratio?

Dividend payments are not included in the SCD/FCFE ratio.

There is difference between FEFE and dividend payout. It differs on tax aspects also.

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