Should a carmaker hand back its cash pile
Question
An activist investor is pressing a car manufacturer to return its surplus cash to shareholders. What do you think?
Short answer
It depends on how excess the cash really is. Returning idle cash via buybacks or dividends can reduce agency costs and lift returns on equity if the firm has no good projects. But carmakers are cyclical, capital-intensive businesses facing heavy investment needs (for example electrification) and severe downturns, so a large cash buffer may be prudent; judge the cash against capex plans, debt, pension liabilities and cyclical stress.
Adapted from Crack, Heard on the Street, Q5.4.18, p.53; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- Sample Spaces, Events, and the Probability Axioms
- Conditional Probability, Total Probability, and Bayes' Rule
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