Management can make any form of distribution to the firm’s shareholders using the company’s free cash flow (FCF). The underlying objective is to maximize shareholder wealth by increasing the firm’s value. Any use of FCF that negatively affects the firm’s value is not considered a good use of the FCF.

Which of the following uses is considered to be a good use of free cash flow?

1.Invest in nonoperating assets
2.Invest in operating assets
3.Theoretically, there are some traditional ways of using FCF. If a company uses all of its FCF to pay off all of its debt, it would reap the maximum benefit from the tax-deductible component of interest payments toward the debt.
4.This statement is false because if the firm uses its FCF to pay off all of its debt, it would have and no deductible.