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What are the main ways a company can use cash?
Answer
Capital allocation menu: (1) Reinvest in the business — CapEx, R&D, working capital; (2) M&A — acquire other companies; (3) Pay down debt — deleveraging; (4) Return to shareholders — dividends or share repurchases; (5) Build the cash reserve — strategic optionality; (6) Pay employees — bonuses, hiring.
Why interviewers ask this
Capital allocation is THE defining skill of CEOs (per Buffett, The Outsiders, etc.). The 'right' answer depends on returns: reinvest if marginal ROIC > WACC; M&A if accretive and strategic; buybacks if shares are undervalued; dividends if there's no better internal use. PE firms scrutinize this constantly when underwriting LBOs.
capital allocation