Explanation:
FCFE Coverage Ratio Calculation:
FCFE Coverage Ratio = FCFE / Total Dividends Paid
Where FCFE (Free Cash Flow to Equity) = Cash Flow from Operations - Capital Expenditures + Net Borrowing
Company A:
Company B:
Company C:
Comparison:
Company B has the highest FCFE coverage ratio (3.20), indicating the greatest dividend safety.
A higher FCFE coverage ratio means the company generates more free cash flow relative to its dividend payments, providing greater safety and sustainability of dividends.
Ultimate access to all questions.
23 An analyst gathers the following financial statement data of three companies financials for the most recent fiscal year (amounts are in $ millions):
| Company A | Company B | Company C |
|---|---|---|
| Net income | 550 | 725 |
| Cash flow from operations | 745 | 810 |
| Capital expenditures | 315 | 432 |
| Net borrowing | -100 | -250 |
| Dividends paid | 135 | 40 |
| Stock repurchases | 65 | 70 |
Based on the FCFE coverage ratio, the company with the greatest dividend safety is:
A
Company A
B
Company B
C
Company C
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