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प्रश्न
Answer the following question:
The Return on Investment (ROI) of a company ranges between 10 - 12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt:
Option ‘A’: Rate of interest 9%
Option ‘B’: Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reasons in support of your answer. Also, state the concept being used in taking the decision.
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उत्तर
Option A is better as in order to raise fixed capital, the ROI (Rate of return on investment), i.e. 10-12% should be higher than the interest rate on borrowings, i.e. 9% in option A. Thus, option A should be opted by the company. The concept that is being used in this decision is Trading on Equity as there is favorable financial leverage involved in the first option.
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संबंधित प्रश्न
Match the pairs
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Group A |
Group B |
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a. Fixed Capital |
1. Owned Capital |
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b, Overdraft facility |
2. Bearer document |
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c. Share certificate |
3. Investment in fixed assets |
|
d. Debentures |
4. Current Account |
|
e. Return on shares |
5. Application Money |
|
|
6. Dividend |
|
7. Investment in current assets |
|
|
8. Borrowed capital |
|
|
9. Savings Account |
|
|
10. Registered Document |
Explain the following as factor affecting the requirements of fixed capital:
Choice of technique
Explain the following as factors affecting the requirements of fixed capital:
Financing alternatives
Explain the following as factors affecting the requirements of working capital:
Scale of operations
Explain the following as factors affecting the requirements of working capital:
Seasonal factors
Explain the following as factors affecting the requirements of working capital:
Production cycle
Explain the following as factors affecting the requirement of working capital:
The credit allowed and availed
Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.
How does working capital affect both the liquidity as well as profitability of a business?
Write a word or a term or a phrase which can substitute the following statement :
The difference between current assets and current liabilities.
Fixed Capital Working Capital
What is meant by capital gearing ratio?
Which of the following factors highlight the importance of capital budgeting decisions
______ of a firm refers to those assets which can be converted into cash or cash equivalents in a short period of time.
______ refers to the decisions regarding where to invest so as to earn the highest possible returns on investment.
Fixed capital is financed through:
A business firm should have extra funds to meet future emergencies. Identify the type of working capital indicated here.
