Cash Management Chitonya Jackson is considering investing in the stock of Bradley Corporation. Looking at Bradley’s balance sheet, Chitonya feels reassured that the company seems to face little risk of insolvency because it keeps large amounts of cash on hand. Further, the company has no long-term debt and little short-term debt. In fact, management’s discussion accompanying the financial statements indicates that management does not believe in incurring debt and, therefore, does not borrow except in unusual cases and normally pays suppliers immediately upon being billed. Because of the large amount of liquid assets held by Bradley, the company is paying only 6 percent interest on the small amount of debt it currently owes. Chitonya also notices that the company’s accounts receivable and inventory have been growing at the rate of about 20 percent per year, so the company has a large amount of current assets, an amount that is several times the amount of the company’s total liabilities. The company’s revenues and income both have been growing at about 10 percent each year, so the company not only appears safe, but seems to be very successful as well. Overall, the company seems to be earning annual profits averaging about 18 percent of stockholders’

equity. However, Chitonya notices that the company’s cash,

while still exceeding the total of all liabilities, has been declining slightly each year.
Chitonya thinks that Bradley is a safe and potentially profitable investment for her, although she is not sure the company is run as efficiently as it should be. However, she decides that she probably will invest $10,000 in Bradley’s stock if she is satisfied with the answers to a few questions. Help Chitonya with her decision by answering the following questions:

a. Does the fact that Bradley is holding a large amount of cash and other current assets mean that management is doing a good job? Explain in detail.

b. Do you think the company’s policy of borrowing very little is a good policy? Explain.

c. If Bradley Corporation is so profitable, why is its cash declining slightly rather than growing? Describe several factors that might account for this phenomenon.

d. If the management of Bradley Corporation estimates that the company’s stockholders individually can earn 10 percent returns on their money, what should management do with any excess cash on hand? Why? What should management do with the excess cash if it estimates the stockholders can earn 20 percent returns on their money elsewhere? Why?

e. Chitonya plans to invest $10,000 in Bradley’s stock, which she expects to grow in value at the rate of 12 percent per year. She also expects the stock to pay her a cash dividend of $500 at the end of each year, which she will put in a sayings account earning 5 percent annual interest. If Chitonya does invest the money in Bradley’s stock and all her projections are realized, how much cash will she have at the end of 10 years if she sells the stock and withdraws all of her money from the savings account at that time?