According to the free cash flow hypothesis that has been proposed to explain investors' reactions to dividend policy changes, a firm:
A. should distribute earnings based solely on investors' preferences; i.e., whether they prefer current income or future income.
B. should pay out all earnings that it can reinvest in acceptable capital budgeting projects.
C. should pay dividends when it has cash flows that exceed its capital budgeting needs.
D. that retains free cash flows has a higher value than a firm that distributes its free cash flows to stockholders.
E. should never distribute its free cash flows, because these funds represent money the firm is free to invest as it pleases .
Answer: C
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