Final answer:
Relatively young firms should consider retaining earnings to reinvest in the firm as their dividend policy facilitates growth, rather than paying out all free cash flows, borrowing funds for dividends, or issuing stock just for dividends. The option (B) is correct.
Step-by-step explanation:
The question relates to choosing an appropriate dividend policy for relatively young firms. In the context of a young firm seeking to expand, the optimal choice for dividend policy would typically be to retain earnings to reinvest in the firm. Such reinvestment can facilitate growth and development, which can be more advantageous than paying out dividends, borrowing funds for dividends, or issuing stock solely for dividend payments.
Issuing stock can help a growing firm by increasing its visibility in the financial markets and providing capital for expansion without the need to repay the funds. However, it does come with the responsibility of compliance with reporting requirements to shareholders and government agencies, like the Securities and Exchange Commission (SEC). Moreover, the process of issuing and placing stock is both expensive and complex, often requiring the input of investment bankers and attorneys. Therefore, option (B) is correct.