Answer: is significantly affected by the amount of dividends paid by the firm.

## Explanation Let's analyze each statement about Free Cash Flow to the Firm (FCFF): ### Statement A: "is a measure of the firm’s dividend-paying capacity." - **Accuracy**: **TRUE** - FCFF represents the cash flow available to all providers of capital (both debt and equity holders) after accounting for capital expenditures and working capital needs. Since dividends are paid to equity holders, FCFF does provide insight into the firm's capacity to pay dividends, though it's not exclusively for dividends. ### Statement B: "increases with an increase in the firm’s net borrowing." - **Accuracy**: **TRUE** - FCFF can be calculated as: FCFF = FCFE + Interest Expense × (1 - Tax Rate) + Net Borrowing Where FCFE is Free Cash Flow to Equity. - From this formula, we can see that an increase in net borrowing (new debt issued minus debt repaid) directly increases FCFF. ### Statement C: "is significantly affected by the amount of dividends paid by the firm." - **Accuracy**: **FALSE** (LEAST ACCURATE) - Dividends are a distribution of cash to equity holders and do NOT affect FCFF calculation. FCFF is calculated from operating activities before considering financing decisions like dividend payments. The formula for FCFF is: FCFF = EBIT × (1 - Tax Rate) + Depreciation & Amortization - Capital Expenditures - Change in Working Capital - Dividend payments are a financing decision and do not enter into the FCFF calculation. They affect Free Cash Flow to Equity (FCFE), not FCFF. ### Why Statement C is Least Accurate: 1. **FCFF is pre-financing**: It measures cash flow available to all capital providers before financing decisions. 2. **Dividends are discretionary**: Dividend policy is a management decision about distributing cash, not generating it. 3. **No direct relationship**: A firm could have high FCFF but pay low dividends (retaining cash for growth), or have low FCFF but pay high dividends (financing dividends through debt). **Correct Answer**: C - This statement is least accurate because dividends do not affect FCFF calculation; FCFF is independent of dividend policy.

Author: LeetQuiz .