Excess cash held by a firm should be:

Question

Quizplus · Accepted Answer

Excess cash held by a firm should be reinvested in projects offering rates of return higher than the cost of capital. If the company invests in projects with returns lower than the cost of capital, then it is decreasing the value of the firm. Further, if the firm reinvests in financial markets, then they have to incur transaction costs and associated risks, which sometimes outweigh the returns. Paying extra coupon payments to bondholders is not a viable option as it rewards only a specific group of stakeholders and fails to create long-term value for the firm.

Excess Cash Held by a Firm Should Be