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) Both that firms with greater free cash flow will pay more in dividends reducing the risk of financial distress; and that issuing debt requires interest and principal payments reducing the potential of management to waste resources.
E) Both that firms with greater free cash flow should issue new equity to force managers to minimize wasting resources and to work harder; and that issuing debt requires interest and principal payments reducing the potential of management to waste resources.

Question

Quizplus · Accepted Answer

The free cash flow hypothesis suggests that issuing debt can discipline management by reducing free cash flow, thus limiting the potential for wasteful spending.

The Free Cash Flow Hypothesis States