sir if we have capital restriction of say $1600 as in example 1 of chapter 9 and if it is not infinitely divisible, we invested in project A,B and D. Total investment was 1500 and you said remaining 100 would be distributed to shareholders but do companies in real situation distribute all their cash if it is excess? I mean to ask will they not keep the cash in case any adverse situation arise instead of distributing all excess cash as dividends to shareholders ?
If you have watched the earlier lectures on the management of working capital, you will know that indeed one of the motives for holding cash is the precautionary motive (in case of adverse situations). However cash needs managing properly and holding excess amounts (over and above the standard motives) is inefficient.
Excess cash should primarily be used to invest to expand the company – new projects and/or the purchase of other companies, but if there are no investments available then it should be used to repay borrowings or to pay higher dividends. In this example, the amount available for investment is presumably the excess cash (after holding additional precautionary cash).
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