Question

Nhi Tran - an analyst of KIS Viestnam Securities Corporatio gathered the following information from a company's 2019 financial statement (in $ millions):

	2017	2018	2019
Net income	3,879	3,586	3,416
Cash flow+A1 from operations	5,025	5,012	4,414
Net capital expenditures	3,933	3,423	2,938
Net borrowing	(400)	(108)	238
Dividends paid	580	903	1,081
Stock repurhase	-	422	1,060

Using the above information, which of the following statements is not correct?

A. In 2019, the company's dividend payout ratio was the highest compared to remaining years (reached 31.56%)

B. The FCFE (Free Cashflow to equity) increased gradually over the years (from 692 million to 1,714 million)

C. By 2019, net income was still declining and FCFE coverage was less than 1 meant that management should probably consider cutting the dividend

D. The dividend covergae ratio increased steadily over 3 years indicating the high risk of a divident cut.

Answer 1

As per the given Question :

Correct Answer is Option D as it is not the correct statement.

All options Explanation :

option A

Payout ratio = Dividends paid / Net Income

Applying above fomula we get that the payout in 2019 is the highest among all years, hence the statement is correct

Option B

FCFE = Cash from Operations - Capital Expenditure + Net Debt Issued

Applying above formula we can notice that FCFE has increase from $692M to $1714M, hence this statement is also correct

Option C

FCFE Coverage formula = FCFE/ (Dividends + Share Repurchase)

Applying the above formula in the years 2019 we get FCFE coverage ratio of 0.8, and in case company cuts dividend it will increase and inch towards 1, hence this statement is also correct.

Option D

Dividend Coverage Ration Formula = Net Income/ Dividends

Applying above formula we get coverage ratio of 6.68, 3.97 and 3.16, for the years 2017, 2018 and 2019, respectively, therefore we can see that it is in downard trend whereas as per statement dividend coverage ratio is steadily increasing, Hence this statement is incorrect and we should choose this option