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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER THIRTY-FOUR

Corporate Investments in Securities

THIS CHAPTER COVERS how to manage a company’s surplus liquidity funds. A firm’s surplus funds or idle cash is usually considered only temporary. The funds should be made available to cover a shortfall in cash flow or working capital or to serve as a reservoir for capital spending and acquisition. Many companies flush with cash have been redeploying surplus cash—not only in increased dividends and mergers and acquisitions (M&A) activity but also in share buybacks, debt payouts, and in some capital expenditures.

CASH AND LIQUIDITY MANAGEMENT

Cash is king in businesses. Without cash and liquidity management, businesses will not survive one day. Most CFOs are conservative (not speculative) when considering investing idle cash in financial securities since they believe the money should be on hand without loss in value of the funds when needed.

How is this surplus cash used?

Generally, there are five choices:

1. Investing in marketable securities

2. Reducing outstanding debt

3. Increasing compensating balances at banks

4. Buying back own stock

5. Paying cash dividends

What are the investment practices?

Here are some new insights on the investment tendencies of corporate investment officers, based on the Fortune 1000 list of large industrial firms. Respondents were asked to describe their own approach to cash management as aggressive, moderate, or passive. We focus on two types—aggressive and moderate. Respondents were asked to ...

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