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Answer: Company B
## 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:** - FCFE = 745 - 315 + (-100) = 330 - Total Dividends = 135 - FCFE Coverage Ratio = 330 / 135 = 2.44 **Company B:** - FCFE = 810 - 432 + (-250) = 128 - Total Dividends = 40 - FCFE Coverage Ratio = 128 / 40 = 3.20 **Company C:** - FCFE = 295 - 75 + (-85) = 135 - Total Dividends = 45 - FCFE Coverage Ratio = 135 / 45 = 3.00 **Comparison:** - Company A: 2.44 - Company B: 3.20 - Company C: 3.00 **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.
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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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