The free-cash-flow theory of takeovers predicts that:

Question

Quizplus · Accepted Answer

The free-cash-flow theory of takeovers predicts that firms with excess cash do not have a tendency to use it wisely, which means that they may be more likely to be targeted for takeovers rather than being the acquirers themselves. This theory suggests that firms with free cash flow may be more vulnerable to takeovers because they may have the resources to make acquisitions but lack profitable investment opportunities, making them more likely to overpay for targets. Therefore, the answer is C, which states that firms with excess cash do not have a tendency to use it wisely. The other choices are not supported by the free-cash-flow theory of takeovers.

The Free-Cash-Flow Theory of Takeovers Predicts That