European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.10, No.30, 2018 131 The Role of Dividend Policy and Investment Opportunity Set Mediating Free Cash Flow Effect on Firm Value Komang Adik Hari Raharja School of Management, Faculty of Economic and Business Udayana University Jl. P.B. Sudirman Denpasar, Bali 80232, Indonesia Ni Luh Putu Wiagustini School of Management, Faculty of Economic and Business Udayana University Jl. P.B. Sudirman Denpasar, Bali 80232, Indonesia Abstract Firm value could be described as investors perception’s of a company’s degree of success that is related to its stock price. Stock prices are determined by internal and external factors of the company that are used as the basis for investors in decision making. The population in the study is a manufacturing company listed on the Indonesia Stock Exchange (IDX) with a total of 60 companies, with census methods. Data collection was carried out using non-participant observation methods. The data analysis technique used is path analysis. Based on the results of the analysis found that, free cash flow has a positive and insignificant effect on firm value, free cash flow has a positive and significant effect on dividend policy, free cash flow has a positive and significant effect on investment opportunity set, dividend policy has a positive and significant effect on firm value , investment opportunity set has a positive and significant effect on firm value, dividend policy capable of mediating the effect of free cash flow on firm value and investment opportunity set companies capable of mediating the effect of free cash flow on firm value. Keywords: firm value, free cash flow, dividend policy, investment opportunity set 1. Introduction Firm value can be measured using Tobin’s Q (Rehman, 2016). Tobin’s Q is the ratio of the market value of a company's assets as measured by the market value of the number of shares outstanding and debt to company assets. The selection of this ratio is because Tobin’s Q is an indicator to measure company performance that is related to firm value and shows a management performance in managing company assets (Rahmawati et al, 2015). Tobin’s Q can also be used to measure company performance in terms of the potential market value of a company (Sudiyatno and Puspitasari, 2010). Stock prices that reflect the company's value can be determined by internal factors such as company performance and management policies as well as external factors in the form of political, economic, cultural, and government policies that are used as a basis for investors in making decisions in the capital market. This research emphasizes on internal factors because it is often seen as an important factor in determining stock prices. The company's internal factors in capital market analysis are often referred to as the company's fundamental factors because these factors are controllable that can be controlled by the company (Adiputra, 2016). The following stock price index of the manufacturing sector in the Indonesia Stock Exchange for the 2015-2017 period is presented in Figure 1.1.