Which of the Following Statements Is FALSE

question 17

Multiple Choice

Which of the following statements is FALSE?

• A) We estimate a firm's current enterprise value by computing the present value (PV) of the firm's free cash flow.
• B) We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash, and paying off all debts.
• C) The more cash the firm uses to repurchase shares, the less it has available to pay dividends.
• D) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered.

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Definitions:

Dividend Irrelevance Theory

Holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital.

Shareholders

Shareholders are individuals or entities that own one or more shares of stock in a public or private corporation, granting them certain rights such as voting on corporate matters and receiving dividends.

Buying and Selling

The basic act of trading or exchanging goods, services, or financial instruments, such as stocks or currencies.

Bird-In-The-Hand Theory

Assumes that investors value a dollar of dividends more highly than a dollar of expected capital gains because the dividend yield component, D1/P0, is less risky than the g component in the total expected return equation rs = D1/P0 + g.