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The Optimum Level of Cash Balances

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The board decided to acquire Forthnet in Greece on the premise that overseas buy-out will result in higher revenues in the long run. Regrettably, the acquisition of Forthnet was proved to be disastrous for Go Plc, and this demonstrates that how holding excessive cash could destabilize an earlier profit-making company. The choice by Go Plc to go for acquisition instead of paying out the excess cash to shareholders by way dividend has been exceptionally disadvantageous as corroborated by constant fall in its share price and the erosion of shareholder value immediately after the acquisition. The optimum level of cash balances that a company can have is the cash balances to meet their expenses, interest and capital expenditures and some level of cash balances to meet any extraordinary scenarios. Anything more than that will be regarded as too much cash reserves held by a company. The quick ratio and the current ratio will help to understand whether a company is having adequate cash reserves to cater to their real-time cash needs. Naturally, investors get worried about companies that hold too much cash because huge cash balances minimize the shareholder’s value as they offer lesser returns on their capital. The main contention of David Einhorn, who is the manager of Greenlight Hedge Fund who successfully obtained an injection from the court against Apple Inc to declare dividends from its cash reserves thereby compelling to declare the dividend from Apple’s cash reserves. Hence, there is a likelihood that the value of shares of Apple may increase by $50 per share or more after such a dividend declaration. Further, Apple shareholders are more worried that Apple may use these excess cash balances for negative mergers or acquisitions. This is supported by the precedents such as Microsoft’s blunder acquisition of aQuantive at $6.3 bn, EBay’s badacquisition of Skype in a $2.8 bn deal, and Quaker Oats fumble acquisition of Snapple at $1.4 bn which finally, it had to write it off.