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The free cash flow hypothesis states that:

Multiple Choice

• a. firms with greater free cash flow will pay higher dividends thereby reducing the risk of financial distress.

• b. firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers.

• c. issuing debt requires payments to creditors thereby reducing the ability of managers to waste resources.

• d. firms should reduce their debt levels as their level of free cash flow rises.

• e. firms with higher levels of free cash flow should reward their managers with bonuses.