What could a company do with excess cash on the balance sheet?
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Answer Posted / archit agrawal
1. Pay dividend : Argument for paying dividend
a) Company can not find opportunities where it can earn more than cost of capital, so it makes sense to return money to shareholders.
b) Company is in stagnant market & is averse to diversification.
Against:
Not pay dividend keep it for good period, because if you pay dividend then you will attract shareholders who love dividends then from next time onwards you will be under compulsion to pay dividends.
If good opportunity comes in future, it will have to look to capital market to fund it, which will result in
2. Reduce existing debt.
This way company can make the company less risky and will reduce cost of equity, though cost of capital would be same.
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