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Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

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CHAPTER 5

Cash and The Optimal Capital Structure

Global cash and near-cash balances are at record levels and continue to grow, topping $2,700 billion for all NYSE and NASDAQ listed companies and growing 24 percent annually. U.S. exchange listed cash holdings are up 770 percent since 1994. On an industry sector basis (not shown), the largest increases came from media (1,700 percent), power (1,360 percent), and telecommunications (1,300 percent). Cash and cash equivalents constitute a record proportion of corporate balance sheets, now at 17 percent of total corporate assets, about 20 percent as large as aggregate corporate revenue. This “problem” is pervasive across most industry sectors, attracting research analyst scrutiny in the Americas, Europe, and Asia.

And until recently the debt and equity markets seemed united in their support of excess liquidity insurance against risk and dry powder for growth. But with balance sheets largely mended, volatility easing, and the outlook for corporate cash flow on the rise, the need for (and benefit of) excess liquidity has been reduced.

Historically, much of this cash was “trapped” overseas for tax reasons but in United States, passage of The American Job Creation Act of 2004 has created a one-time window of opportunity to redeploy capital to more productive uses.

Increasingly, the optimal capital structure question is expanding to include the left-hand side of the balance sheet. It is now as much a question of cash balances and pension ...

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