1. Which of the following help firms determine the actual implementation of their distribution policy? Check all that apply.
a. The level of payout to shareholders that is sustainable in the future
b. The level of retained earnings to maintain
c. The level of reinvestment in treasury bills and bonds
d. the method of payment to shareholders - cash or stocks
A firm can make any form of distribution to its shareholders using the free cash flow that it generates. The underlying objective is to maximize shareholder wealth by increasing the firm's value. Any use of the FCF that has a negative impact on the firm's value is not considered a good use of the FCF.
2. Which of the following uses is considered a good use of free cash flow? Choose best answer
a. Pay principal on debt
b. Make payments toward capital expenses
3. A company invests 15% of its FCF in marketable securities. This makes it difficult for the firm to access its funds to support its growth. This statement is false because marketable securities _______________ easily liquidated.
a. can be
b. cannot be