Chartered Financial Analyst Level 2

Explanation

The FCFE coverage ratio measures a company's ability to pay dividends and repurchase stock from its free cash flow to equity. The formula is:

$\text{FCFE Coverage Ratio} = \frac{\text{FCFE}}{\text{Dividends + Share Repurchases}}$

Given:

• FCFE = $492 million
• Dividends paid = $215 million
• Stock repurchases = $173 million

$\text{FCFE Coverage Ratio} = \frac{492}{215 + 173} = \frac{492}{388} = 1.268$

This rounds to 1.27x, which corresponds to Option A.

Key Points:

• The FCFE coverage ratio indicates how many times the company can cover its shareholder distributions (dividends + repurchases) from its free cash flow to equity
• A ratio greater than 1 indicates the company generates sufficient FCFE to cover shareholder distributions
• A ratio of 1.27x means the company can cover its shareholder distributions 1.27 times over