Which of the following statements is true concerning the free cash flow hypothesis? Select one: A....

Which of the following statements is true concerning the free cash flow hypothesis?

Select one:

A. Companies with high operating earnings must have high free cash flows.

B. Companies with low capital expenditures must have high free cash flows.

C. Companies that are efficiently managed must have high free cash flows.

D. All of the above are true.

E. None of the above are true.

Solutions

Expert Solution

ANSWER: D, All the above are true.

Free cash flow is a measure of companies financial Performance.FCF is the cash available with the company after spending necessary amount for expansion of assets. Free cash flow can be calculated by subtracting capital expenditure from operating cash flow.

FCF=Operating cash flow-capital expenditure.(Earnings After tax+ depreciation+ amortization-change in net working capital –capital expenditure)

So companies with high operating earnings must have high free cash flows. As capital expenditure decreases, free cash flow increases. This implies companies with low expenditure must have high free cash flows. Also efficiently managed companies must have high operating earnings and efficient management must control unnecessary funding for expansion of assets and additional working capital. So Companies that are efficiently managed must have high free cash flows .

jeff jeffy answered 1 year ago

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