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Regarding agency issues, the free cash flow hypothesis states that: issuing debt requires payments to creditors thereby reducing the ability ofmanagers to waste resources.firms with
Regarding agency issues, the free cash flow hypothesis states that:
issuing debt requires payments to creditors thereby reducing the ability ofmanagers to waste resources.firms with greater free cash flow will pay higher dividends thereby reducing therisk of financial distress.
firms should reduce their debt levels as their level of free cash flow risesfirms with greater free cash flow should issue new equity to help minimize thewasting of resources by managers.
firms with higher levels of free cash flow should reward their managers withbonuses.
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