8. What can the companies do when they have surplus cash

Expert Solution

Solution:-

The various uses of surplus cash that companies can resort to are as follows:-

Using cash in mergers and acquisitions is one of the primary reasons companies like to keep surplus cash on the balance sheets, so that when opportunities for acquisitions arise, they have the required cash to make those acquisitions. This helps companies tackle competiton and achieve inorganic growth of the business
The companies can use surplus cash to pay dividends to shareholders. This is particularly useful when companies don't forsee M&A opportunities in the near future and the business is relatively mature with fewer expansion opportunities
The cash can be used to buyback own shares from the open market, particularly at the times when markets are bearish and shares are undervalued respective to their intrinsic values
One of the most important uses of surplus cash is to make capital expenditures for business expansion and thus fueling organic business growth
Repay the long-term debt of the business and thus reducing financing risk

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