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Free cash flows A.are usually best paid out as dividends or used to repurchase stock. B.should...

Free cash flows

A.are usually best paid out as dividends or used to repurchase stock.

B.should be invested in new projects, even if the NPV is negative.

C.are always good to retain.

D.should almost always be paid out as bonuses to help retain top managers.

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Answer #1

ANSWER : A : ARE USUALLY PAID OUT AS DIVIDENDS OR USED TO REPURCHASE STOCK (Thumbs up please)

FREE CASH FLOW IS DEFINED AS SUM AVAILABLE FOR DISTRIBUTION TO SECURITY HOLDERS OF A COMPANY.

SO COMPANY CAN USE IT TO REWARD SHAREHOLDERS BY WAY OF DIVIDEND OR BY WAY OF REPURCHASE TO INCREASE THE VALUE OF EARNINGS PER SHARE AND THEREBY SHARE PRICE.

IF PROJECT HAS NEGATIVE NPV, THEN WHY SHOULD FIRM INVEST BECAUSE IT WILL REDUCE WEALTH OF SHAREHOLDERS, SO IT CAN NOT BE THE ANSWER

FREE CASH FLOWS ARE NOT GOOD TO RETAIN BECAUSE CASH DOES NOT YIELD ANYTHING TO THE SHAREHOLDERS.

AS DEFINED EARLIER, FREE CASH FLOW IS FOR THE DISTRIBUTION OF SECURITY HOLDERS AND NOT FOR EMPLOYEES OF THE COMPANY, SO THIS ALSO CAN NOT BE THE ANSWER

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