Which of the following statements is most correct?
A) Free cash flows are called "free" because the cost of capital for these cash flows is zero.
B) Stock is valuable only because it generates cash flows for the investor.
C) Managers can affect firm value by changing the riskiness of its cash flows.
D) (a) and (b) are correct.
E) (b) and (c) are correct.

Question

Quizplus · Accepted Answer

Option B is correct because a stock's value is based on the cash flows it generates. Option C is also correct as managers can influence the firm's risk profile by controlling its operations, investments, and financing decisions, which in turn affects the cash flows. Option A is not correct because free cash flows refer to the surplus cash generated by a company after meeting its capital expenditures and working capital requirements, and it does have a cost of capital. Therefore, options (a) and (b) are incorrect.

Which of the Following Statements Is Most Correct