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Question of the Week: Level 2 - Corporate Finance

According to Jensen’s free cash flow hypothesis, a company’s shareholders could decrease agency costs by demanding that management pay out all free cash flow as dividends.  Such a solution would most likely appear in which type of company?

Question of the Week: Level 2 - Corporate Finance 9 votes

A. Large-cap value stock.
88% 8 votes
B. Large-cap growth stock.
11% 1 vote
C. Small-cap growth stock.
0% 0 votes

Comments

  • MarkMeldrumMarkMeldrum OntarioPosts: 73 Associate
    The correct answer is Option A. 

    In general, it makes sense for small or growing companies in industries characterized by a rapid change to hold cash and pay low or no dividends but it does not make sense for large, mature companies in relatively non-cyclical industries.  Growth stocks need to reinvest in growth, whereas value stocks tend to generate strong free cash flow and have significantly fewer investment options.
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