Which of the following statements is true about the free cash flow hypothesis?

Question

Quizplus · Accepted Answer

The free cash flow hypothesis suggests that firms should pay dividends only when they have excess free cash flows after meeting their capital budgeting needs. This is because retaining excess cash can lead to agency conflicts and inefficient use of resources. Therefore, option C is the correct statement about the free cash flow hypothesis. Option A is incorrect because the objective of the free cash flow hypothesis is to maximize shareholder value, not to cater to individual investor preferences. Option B is incorrect because reinvesting earnings at a profitable rate does not guarantee higher shareholder value. Option D is incorrect because there is no clear evidence that firms that retain their free cash flows have higher values than firms that distribute them. Option E is incorrect because retaining all free cash flows is not recommended under the free cash flow hypothesis.

Which of the Following Statements Is True About the Free