Explanation

Note: The question appears to be incomplete in the provided text. Based on the context of agency costs and corporate finance principles, the most likely correct approach would be:

Return excess cash to shareholders through dividends or share repurchases.

Agency Cost Context:

• Agency costs arise from conflicts between managers and shareholders
• Managers may pursue personal goals (empire building, excessive perks) rather than maximizing shareholder value
• When companies have excess cash and limited investment opportunities, managers might:
  • Make poor acquisitions
  • Invest in negative NPV projects
  • Engage in wasteful spending

Best Solution:

• Return cash to shareholders through dividends or share repurchases
• This reduces the "free cash flow" available for managers to misuse
• Aligns management incentives with shareholder interests
• Forces managers to seek external financing for new projects, which subjects them to market discipline

Alternative approaches:

• Increase debt financing (creates fixed obligations that discipline management)
• Implement stronger corporate governance
• Use performance-based compensation

However, returning excess cash is typically the most direct and effective solution for reducing agency costs in this scenario.