Question

Fill in the blank using the following terms (debt issues, higher, internally generated cash, lower, risen, financial deficit, fallen, negative, stayed roughly constant)

By far the largest source of cash for most companies comes from ____________. The gap between this cash and the cash that companies need is called the __________. On average, equity issues have been ___________; in other words, companies have used the cash from _______ and retained earnings to buy back their stock. Debt ratios can be measured using either market values or book values. Generally, book debt ratios are __________ than market value ratios. In the 30 or so years before 1990 both debt ratios have on average _________, but since then they have ___________.

Answer 1

Most companies' largest cash source comes from internally generated cash, with a financial deficit representing the needed additional cash. Generally, book debt ratios are higher than market values, which have risen before 1990 and fallen thereafter.

Step-by-step explanation:

The primary source of cash for most companies is generated internally through operational activities and retained earnings. Internally generated cash encompasses the funds produced from a company's day-to-day operations, including sales, services, and other revenue-generating activities. Retained earnings, the portion of net income not distributed as dividends but reinvested in the business, also contribute significantly to a company's available cash.

The financial deficit arises when the internally generated cash and retained earnings fall short of the cash required by companies for various purposes, including investments, expansions, debt repayments, or shareholder distributions. This deficit highlights the potential need for external financing options, such as equity or debt issuance, to bridge the gap between available cash and financial requirements.

In recent decades, companies have demonstrated a trend of relying on internally generated cash and retained earnings rather than resorting to equity issuances. This is reflected in the lower issuance of new equity, with companies often opting to use available funds to repurchase their own stock. Share buybacks are a common strategy employed by companies to return value to shareholders and enhance earnings per share.

Debt ratios, which measure a company's leverage, can be evaluated using either market values or book values. Generally, book debt ratios, calculated based on the accounting values of liabilities, tend to be higher than market value ratios. Over the years leading up to 1990, both book and market value debt ratios saw an average increase, indicating a rising trend in leverage. However, since 1990, there has been a reversal of this trend, with debt ratios experiencing a decline. This shift may be attributed to various factors, including changes in financial management strategies, economic conditions, and shifts in corporate priorities.