Technologies is having a huge net cash reserve of ?2. Ban. The problem faced by the management was on how Infinite should manage the cash reserve. The case has various aspects to analyze and understand. Being a capital intensive business, it is critical that Infinite has a good cash management strategy in place. Infinite Technologies- semiconductors manufacturing many is a capital intensive business.
A huge cash reserve in a certain way is an advantage to Infinite, if they manage to utilize the reserves at right time for R&D. During a downturn, such organizations can utilize the cash reserves to invest in R&D to innovate and sustain business. In such companies, R&D plays a major role. 1 . Considering the context of Infinite Technologies, identify two disadvantages of having too much cash which according to you are the most important ones.
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Constant high levels of cash sin balance sheets may signify that the management is not making right decisions in investment and utilization of cash reserve.It can also impact organizations the cost of losing opportunities (opportunity cost) especially when the cash in not used appropriately in time. With high cash reserves, the management may also tend to make wrong decisions of utilizing the cash reserves for capital expenditures who ICC will impact the cost of capital for the organization. In fact the organization can raise a loan in such scenarios which will in turn provide tax benefits to the company. The debt volume can be decided keeping in mind enough cash serves to sustain the business and in a way that the tax burden is reduced.The cost of retaining the cash in bank can also attract taxes especially considering the wide foray of regions that Infinite is currently spread across. The organization will end paying out the interest earned on cash reserves in paying Off the taxes in turn creating very less value for such a high cash reserve.
Though the company has high cash reserve the beta equity of the company is 1. 2 which is a risky proposition and may not keep the shareholders confident about its stocks. I think Infinite should utilize the cash reserves to buy back shares in down times, provide good dividends in good times of business scenarios.Also, Infinite can invest wisely in acquisitions.
2. Taking your organization or a client organization describe a situation of high cash balance tattoo may have come across, if any. What might have been the motive for maintaining the high cash balance? I do not have clear idea on the current scenario or a client scenario.
However can relate to my first employer – a Manufacturing company. The few reasons hat can relate to why it would have had high cash reserves 1 . The company has recovered from a down turn where they had to offer IVR, sell off/ close business to recover the business.The stock price had gone down from 400 to 2 digit values. 2. Working capital requirement of the company was very high.
Considering the earlier experience, cash reserves acted as a security for the Organization. 3. The company had high requirement to innovate and invest in Research and development to ensure they sustain the business. 4. Post recovering from downturn, the company was focused on core areas of equines – Energy and environment – With this strategy, the focus was to develop new areas of business like Solar, macaroon, etc.
The cash reserve helped in making acquisitions, investment in technology etc. Where Debt raising could be a risky proposition 5. The Company also has a union governed by the statutory norms. Cash reserves provide security of taking care of any unforeseen exigencies 6. Acquisitions in global market / joint ventures- The Company have invested in Java/ acquisitions to bring in new technologies, penetrate new markets thus expanding the business globally. How is Infinite Technologies’ situation different from the company that you have identified under (2) above. What will be your recommendation to Infinite Technologies on its cash position? Considering the example have given, Infinite also is in to manufacturing and high cash reserves. However considering the nature of business Infinite business has a cycle of ups and downs and constantly needs to invest in research.
Though the company mentioned above and Infinite are cash rich, unlike Infinite, my previous employer has regularly invested in research,