1. Dividend policy and free cash flow Company management, especially in established corporations, will formulate a policy that is often called a distribution policy or a payout policy. This policy specifies what management intends to do with the company's profits and any free cash flow (FCF) generated by the firm. The objective is to create a distribution policy that increases the value of the firm and maximizes the wealth of the firm's shareholders. Which of the following factors affects management's decisions regarding a firm's distribution policy? Check all that apply. The stability of payments to shareholders The level of cash distributions The form of payment to shareholders The level of debt and interest payments Management can make any form of distribution to the firm's shareholders using the company's free cash flow (FCF). The underlying objective is to maximize shareholder wealth by increasing the firm's value. Any use of FCF that negatively affects the firm's value is not considered a good use of the FCF. Which of the following uses is considered to be a good use of free cash flow? Select the better answer. Pay principal on debt Make payments toward capital expenses Theoretically, there are some traditional ways of using FCF. If a company uses all of its FCF to pay off all of its debt, it would reap the maximum benefit from the tax-deductible component of interest payments toward the debt. This statement is false because if the firm uses its FCF to pay off all of its debt, it would have and no deductible