Dividend policy and free cash flow Companies, especially established corporations, set up a policy that is often called a distribution policy or a payout policy. These policies specify what companies intend to do with their profits and the free cash flow (FCF). The objective is to create a distribution policy that increases the value of the firm and maximizes shareholder wealth. Which of the following help firms determine the actual implementation of their distribution policy? Check all that apply. The level of retained earnings to maintain The level of reinvestment in Treasury bills and bonds The level of payout to shareholders that is sustainable in the future 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. Which of the following uses is considered a good use of free cash flow? Choose the best answer. Pay interest expenses Invest in business facility improvement A company's investment opportunities and operating plans determines its level of FCF which can be used to distribute dividends to repurchase stock. This process is pretty straight forward in most companies across industries. This statement is false, because sometimes the dividend distribution policy determines if the company is likely to scale back their operating and growth plans to existing dividend policy