General Electric was relying on short-term borrowing to finance their operations. This strategy worked well before the
Question:
General Electric was relying on short-term borrowing to finance their operations. This strategy worked well before the financial crisis in 2008.
Read about GE's financial challenges around the financial crisis of 2008. http://blogs.wsj.com/moneybeat/2015/06/09/a-look-at-ges-slim-down-since-the-financial-crisis/
After the credit market turbulence, however, GE had difficulties in borrowing short-term debt. GE had a $50 million line of credit that they thought they would never need but were confident that would definitely get it when requested. Things however, changed dramatically during the financial crisis in 2008. GE couldn't pull its line of credit because it would render the bank that granted the line bankrupt and cause a series of cascade bankruptcies after that. GE learned a painful lesson that a line of credit is not as good as cash.
What GE experienced illustrates how important working capital management to the firms' financial position and risk.
In order to meet their working capital needs, companies have the option to hold cash or hold on to a line of credit.
Discuss:
Evaluate whether you would recommend companies to hold cash or to rely on the line of credit. Why or why not.
Would you make different recommendations for different types of firms?
What implications does liquidity management have on your recommendation?
Find news examples and evidences to support your position.
Expert Answer:
1 I would not recommend companies to hold cash but to keep liquid assets and rely on a line of credit when needed Keeping cash is not good for the company since cash has poor return prospects and due ... View the full answer
