Question

Because of a new product line, your company's sales over the last few months have increased significantly. As a result, the amount of cash held by the company has increased to levels never experienced before. An evaluation by the company's financial staff concludes that the company is holding too much cash. This situation is reported to the stockholders.

How do you think the stockholders would react to this information?

What options do you have to deal with the concerns of the stockholders without creating any additional risk?

Just–in–time (JIT) inventory systems were first developed by the Japanese and quickly adopted around the globe by many large firms. One of the first to adopt the system in the United States was the automobile industry. In your opinion, is the JIT system a system that can and should be adopted by small, individually owned firms? Why or why not? Would the smaller firms have any advantage in terms of their ability to use such a system? Why or why not? What would be the benefits of employing such a system in the economy?

Answer 1

(1) Stockholders will react negatively to this information that the company is holding too much cash in its books. This is because cash is just sitting in the books unused and hence it is in a way creating opportunity costs for the company and its shareholders. Cash sitting idle means lost opportunities of investment and lost opportunities for business growth. This creates opportunity costs.

To deal with the concerns of the stockholders, without creating any additional risk, the excess cash can be used to buy back the shares of the company, to pay out increased dividends, to make investments in cash equivalent securities like commercial paper and short term federal bonds. All these options will not create any additional risk for the shareholders.