Which of the following statements is least accurate? A firm’s free cash flow to equity (FCFE):
- is a measure of the firm’s dividend-paying capacity.
- increases with an increase in the firm’s net borrowing.
- is significantly affected by the amount of dividends paid by the firm.
Solution
C is correct. Dividends, a discretionary cash flow from financing activities, have no bearing on a firm’s free cash flow to equity, as can be seen from the formula: FCFE = CFO – FCInv + Net borrowing.
A is incorrect. FCFE is a measure of dividend-paying capacity.
B is incorrect. FCFE increases with an increase in the firm’s net borrowing.
