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Question: a a firm has positive free cash flow and a...

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a)     A firm has positive free cash flow and a net dividend to shareholders that is less than free cash flow. What must it do with the surplus of the free cash flow over the dividend?                                                                                                                                                  

b)    Explain why it is common that firms with higher return on net operating assets (RONA) also have negative free cash flows. Also, explain why such firms tend to have above-average forward P/E ratio.                                                                                                         

c)     P/B ratio is often said to indicate a growth stock. Explain under which situation a firm with high P/B can be a zero growth firm.                                                                                            

 

d)    Explain why a firm can have a low trailing P/E ratio but have a high expected earnings growth rate in the future.                                                                  

e) Under what conditions would a firm’s return on common equity (ROCE) be equal to its return on net operating assets (RNOA)?

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