Question

The free cash flow hypothesis states:

a. that firms with higher levels of free cash flow should reward their managers with bonuses.
b. that firms with greater free cash flow will pay more in dividends thereby reducing the risk of financial distress.
c. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources.
d. that firms will higher levels of free cash flow should reduce their debt levels.
e. that firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers.

Answer 1

C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources.

Step-by-step explanation:

Free Cash Flow is the cash generated by an organisationafter it has accounted for the outflows to capital assets maintenance costs and operating activities. Free Cash flow is a measure of a company's profitability after non-cash expenses in the account statement have been deducted. It is the cash flow an organisation has when it has limited or no debt obligations in its portfolio

The Hypothesis of free cash flow states that an organisation with a large amount of free cash will display less financial or spending discipline compared with an organisation that has debts obligations to spend cash on.

Based on the hypothesis, it becomes essential for such organisations to issue debts so that as the legal obligations (debts, principal and interest) increases, the potential to waste money as a result of fre cash flow reduces.