The free cash flow hypothesis states:
A) that firms with greater free cash flow will pay more in dividends reducing the risk of financial distress.
B) that firms with greater free cash flow should issue new equity to force managers to minimize wasting resources and to work harder.
C) that issuing debt requires interest and principal payments reducing the potential of management to waste resources.
D) that issuing equity reduces the potential of management to waste resources.

Question

Quizplus · Accepted Answer

The free cash flow hypothesis suggests that issuing debt can discipline management by requiring regular interest and principal payments, thus reducing the likelihood of resource wastage.

The Free Cash Flow Hypothesis States