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Generating cash flow

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Dallas Software is an all-equity financed, publicly-traded software company. It is generating cash flow exceeding its investment needs. The CEO of the company proposes using the excess cash to buy a publicly-traded restaurant chain. The CEO argues that "We are generating more cash than we need, so we have free cash, and we should invest it in something, even if the returns to that investment are less than our cost of capital. In addition, we would diversify away a lot of our cash flow risk since the cash flows from the software and restaurant businesses are largely uncorrelated, and this diversification will make our shareholders happy." Does each of the CEO's two arguments make sense? Assume that there are no tax considerations here.

Reference no: EM133060542

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