According to the free cash flow hypothesis $($residual dividend policy$)$ that has been proposed to explain investors' reactions to dividend policy changes, a firm

should pay dividends when it has cash flows that exceed its capital budgeting needs

should distribute earnings based solely on investors' preferences; i$.$e$.,$ whether they prefer current income or future income

that retains free cash flows has a higher value than a firm that distributes its free cash flows to stockholders

should never distribute its free cash flows, because these funds represent money the firm is free to invest as it pleases

should pay out all earnings that it can reinvest in acceptable capital budgeting projects