Question #27
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 11
Status: Unattempted
Correct Answer: B
Question
Grommetco produces plastic insulators for the electrical appliance industry. Excerpts from Grommetco's financial results for 2010 are as follows: Net Income (earnings) $10 Free Cash Flow to Equity $8 Dividends Paid $1 Stock Repurchases $3 Which of the following statements is most accurate? Grommetco's:
Answer Choices:
A. FCFE coverage ratio is 2.0
B. dividend coverage ratio is 2.5
C. dividend payout ratio is 0.4
Explanation
Dividend coverage ratio = Net Income / Dividends = $10 / $1 = 10.
FCFE coverage ratio = FCFE / (dividends + share repurchases) = $8 / ($1 + $3) = 2.0.
Dividend payout ratio = Dividends / Net Income = $1 / $10 = 0.1.