Part 1 – Current Events

In the wake of the worst financial crisis since the great depression, publicly traded companies have accumulated an unprecedented amount of cash on their balance sheets (Exhibit 2). According to the latest quarterly reports published by S&P 500 companies, the 256 companies increased cash and short-term investments by a combined 78 percent year over year. On average the S&P 500 member’s cash and cash equivalents rose by about 14 percent quarter over quarter to $2.18 trillion, the most on record in nine years of Bloomberg data[1]. By late 2008, even large companies faced the threat that they wouldn't be able partake in the short-term borrowing needed to finance payrolls and the purchase of inventory. The U.S. government took note of the credit freeze and swiftly intervened by bailing out a number of faltering financial institutions, which effectively stabilized the financial markets. Despite drastic measures to prevent an economic collapse, decades of economic growth were lost and there are continuing fears of a double-dip recession as we move forward. In addition to the economic concerns in North America, companies are wary of the possibility of an escalated debt crisis in Europe, which could potentially freeze the lending markets, as was the case in 2008. Some economists believe that the issue is compounded further by uncertainty with regards to U.S. tax policy and stimulus measures. Renewed confidence in the corporate-bond markets has allowed larger corporations to raise a record amount of cash as they capitalize on historically low interest rates (Exhibit 3). In addition to drastic increases in cash flow from financing activities, there have been significant increases in cash flow from operations. Companies were forced to make deep cuts during the recession in an effort to grow their margins as revenues declined. As