Answer to Question #172832 in Finance for kavisha

Question

a firms that holds cash beyond its minimum requirements is increasing its potential earnings . true or false ?

Answer 1

In general terms, corporations hold cash for the Research & Development of new products; to pay dividends to shareholders; to engage in a stock buyback; to pay down maturing debt. If they had debt outstanding at a high rate & the bond was sold with a call feature in place, they might use cash to retire the bond, thus lowering the amount of interest expense (& debt if they do not issue new bonds paying a lower rate).

In today’s market, the newspapers publish stories about the cash held by some corporations. While many of these companies will use the cash for the above purposes, they also may be holding the cash in subsidiaries located in countries with Effective Corporate Tax rates lower than the U.S.