1. According to the signaling theory, which of the following actions by the management is taken as a signal that the firm's prospects are not bright? Assume that the firm has multiple financing alternatives.
a. A small company raising any required new capital by issue of new shares
b. A mature company raising any required new capital by issue of new shares
c. A small company maintaining a reserve borrowing capacity
d. A mature company maintaining a reserve borrowing capacity
e. A mature company raising any required new capital using debt beyond the normal target capital structure
2. Which of the following statements is true about the free cash flow hypothesis??
a. ?Firms should distribute earnings based on investors' preferences toward current income and future income.
b. ?Firms should distribute earnings that can be reinvested at a very profitable rate.
c. ?Firms should pay dividends when free cash flows in excess of capital budgeting needs exist.
d. ?Firms that retain free cash flows have higher values than firms that distribute free cash flows.
e. ?Firms should never distribute their free cash flows.