Question 4:(20 marks)

(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?

(4 marks)

(b)Describe the characteristics of firms with a low P/E ratio but a high P/B ratio. (4 marks)

(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 negative growth firm. (4 marks)

(d)Explain why a firm can have a low trailing P/E ratio but have a high expected earnings growth rate in the future.(4 marks)

(e)Explain why borrowing might reduce the return on common equity?(4 marks)