According to the free cash flow hypothesis that has been proposed to explain investors' reactions to dividend policy changes, a firm:

Question

Quizplus · Accepted Answer

The free cash flow hypothesis suggests that a firm should only distribute dividends when it has excess cash flows after fulfilling its capital budgeting needs. This approach ensures that the firm does not retain excess funds that may be misused in unprofitable projects. Therefore, option C is the correct answer. Option A is incorrect because the firm should consider its financial position and growth prospects before deciding on dividend payouts. Option B is also incorrect because the firm should allocate funds between dividends and capital expenditures based on its financial situation. Option D is incorrect because retaining free cash flows does not necessarily increase the firm's value. Finally, option E is incorrect because investment opportunities may not always generate returns higher than the cost of capital, and therefore, dividend payouts may be necessary.

According to the Free Cash Flow Hypothesis That Has Been