Concept Check

11.1: Book value is a proxy for market value of existing assets
The total market value reflects both existing assets and expected future growth.

11.2: I would expect an increase in the cash returned to stockholders
Firms are now in a position to go out and raise capital, at low cost and quickly, to meet investment needs. They do not have to hold back on cash.

11.3: All of the above
Earning are not cash flows, and firms have to reinvest and pay off debt before they pay dividends.

11.4: It will increase the cash balance of the company
The FCFE is after capital expenditures and working capital needs are met. Thus, if it is not returned to stockholders it will accumulate as cash.

11.5: It invested in good projects last year/ It does not expect to invest in good projects over the next five years.
Assuming that the cost of capital has not changed (If we do not, only the second statement is true), the firm earned more than its cost of capital last year (marginal return on capital).

11.6: A company with a historical return on capital of 6% and a large cash balance
These are the companies where the risk is greatest that the cash will be invested in poor projects.

11.7: I would expect dividends and stock buybacks to decrease
The threat of a hostile takeover, which can cause companies to return cash to stockholders, has been reduced.

11.8: No.
For every stockholder they gain by paying dividends, they will probably lose two, who will not want to hold the stock because it pays a dividend.

11.9: The bank will not be punished for its low dividends as long as it tries to convey information to its investors about the quality of its projects and growth prospects
While stockholders will judge the firm fairly, they need the information to make the judgment.