Question

A company produces goods that are very profitable. They are currently developing a new product line....

A company produces goods that are very profitable. They are currently developing a new product line. Why must it take care to ensure that it has sufficient cash on hand to meet its obligations?

1. profits from the current sales will be lost when returned to the shareholders in the form of dividends

2. the company will always build up debt which must be repaid in order to bring the new models to market

3. this will enable the company to maintain a high share price for its stock

4. new products usually require a lot of money to develop and bring to market before they generate revenue

5. equity must be raised to finance the development of new models to replace the exisiting models

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Answer #1

Sufficient cash balance is required to repay the debt as and when debt become payable.Also it helps the company to bring the product to the market before they generate revenue.

In case of company,profit belongs to shareholder and distributon of profit does not means lost of profit.

Whether you raised the fund through equity or debt,cash balance has same importance under both method of financing.

Cash balance does not impact the share price of stock

Accordingly,the correct answer is option 2 and 4.

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