 In our earlier discussion on firms' choice of splitting its after-tax earnings into retention or cash dividend along with certain trade-offs of cash retention, let's continue it. Although cash retention has certain disadvantages in terms of tax, yet firms try to keep larger amount of cash balances to cover potential future needs in the days to come, so that the firms may avoid any future shortfall. Therefore, the holding of cash allows a firm to avoid any transaction cost of raising new capital in the future. Therefore, it is desirable that there should be some balance between the tax cost of holding cash with the potential benefit of no capital issue in the future. This means that firms having earning volatility may also build cash reserves in order to avoid financial distress and its associated costs, but there also exists certain agency costs for retaining the cash by the firm. Holding cash above and beyond the future needs of a firm does not benefit the firm's shareholders at all because holding too much cash may accrue certain associated agency costs to be incurred by the firm. In fact, the managers may use the surplus funds for their own vested interests. Also unions, the government and other entities may take advantage of the firm's deep pockets. Now the solution is that the leverage, dividends and share repurchases are the ways to avoid these agency costs and also such payouts can boost the stock prices by reducing the level of cash within the firm. To understand this, we have an example. We have an all-equity firm with outstanding shares of 100 million. The firm has cash in hand of 150 million. The firm has expectations about its future annual free cash flows to the tune of 65 million. Now the firm is planning to have an increment in its future free cash flows by 12% per annum. The firm's overall cost of capital is 10%. So the question is that, is there any change in the share prices owing to the usage of cash on the repurchase of shares rather than any expansion plan? We have a solution now. If we use cash for the expansion, the firm's value using perpetuity model will be equal to $728 million or $7.28 million. So this is the value if the firm goes for any investment opportunity. Now the cash for repurchase is then the firm's value using the perpetuity will be equal to $800 million or $8 per share. So there is an increase from $7.28 per share to $8 per share as an alternative to the expansion plan. Then repurchase of shares will be held to the tune of 18.75 million shares and due to this the share price at after the repurchase transaction will again be equal to the $8 per share. So we see that as a consequence of repurchase transaction, there is no change in the share price which remains at $8 per share. An investment cut for a share repurchase in fact increases the share price by $0.72 per share because the expansion has negative net present value. There is an outlaw of $150 million backed by only $7.8 million. This means that the negative NPV of $7.2 million is there and if translated into terms of per share and negative NPV it comes to $0.72 per share. So what is the final option for the firm either to go for retention or go for an investment proposal? If you see the final option with the firm is to choose cash retention to use it for future expansion plans and it is better to avoid any financial distress caused in the days to come. The managers while taking such capital structure decisions may prefer to retain control of the firm's cash rather than to pay it out to the shareholders as cash dividend or through shares repurchase. The managers do this practice in order to fund the investment that may be costly for the firms or its shareholders but such type of investments will be financially beneficial for the managers or the managers may use funds to reduce leverage or risk of financial distress that may threaten their job security. Now there is a theory that is management entrenchment theory. This theory states that managers or management finally pay out cash only when they are pressurized by the investors of the firm.