Explanation

Option C is correct - Company C has the greatest dividend safety based on the FCFE coverage ratio.

FCFE Coverage Ratio Calculation:

The FCFE coverage ratio measures dividend safety by comparing Free Cash Flow to Equity (FCFE) to total cash distributions (dividends + share repurchases).

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

Where: $\text{FCFE} = \text{Cash Flow from Operations} - \text{Capital Expenditures} + \text{Net Borrowing}$

Calculations:

Company A:

• FCFE = 745 - 315 + (-100) = 330
• Total Distributions = 135 + 65 = 200
• FCFE Coverage Ratio = 330 / 200 = 1.65

Company B:

• FCFE = 810 - 432 + (-250) = 128
• Total Distributions = 40 + 70 = 110
• FCFE Coverage Ratio = 128 / 110 = 1.16

Company C:

• FCFE = 295 - 75 + (-85) = 135
• Total Distributions = 45 + 50 = 95
• FCFE Coverage Ratio = 135 / 95 = 1.42

Analysis:

• Company C has the highest FCFE coverage ratio (1.42)
• Company A has 1.65 (higher than C), but wait - let's verify:
  • Company A: 330/200 = 1.65 ✓
  • Company C: 135/95 = 1.42 ✓

Correction: Actually, Company A has the highest FCFE coverage ratio (1.65), not Company C. Let me recalculate:

Final Calculations:

• Company A: FCFE = 745 - 315 - 100 = 330; Coverage = 330/(135+65) = 330/200 = 1.65
• Company B: FCFE = 810 - 432 - 250 = 128; Coverage = 128/(40+70) = 128/110 = 1.16
• Company C: FCFE = 295 - 75 - 85 = 135; Coverage = 135/(45+50) = 135/95 = 1.42

Company A has the highest FCFE coverage ratio (1.65), making it the company with the greatest dividend safety.

Answer should be A, not C.