Concept Check

11.1: Companies which are perceived to have great investment opportunities
Buying back stock will reduce the amount that these companies have available to investment in these great projects.

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

11.3: 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.

11.4: It invested in good projects last year since the marginal return on capital > cost of capital
All the other returns on capital - average over the last 5 years, industry average which is also predicted return on capital) - are lower than the cost of capital.

11.5: 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.

11.6: 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

11.7: 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.