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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
Explain the following as factors affecting the requirements of working capital:
Nature of business
State, with reason, whether the following statement is True or False.
Requirement of working capital does not depend upon any factor.
Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.
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.
What is working capital?
Fixed Capital Working Capital
Answer the question.
Briefly explain any four types of working capital required by a business concern.
Why is working capital also known as circulating capital?
Explain any four factors that affect the capital structure of a company.
Companies with a higher growth potential are likely to
Current assets of a business firm should be financed through
Which of the following factors highlight the importance of capital budgeting decisions
Dhaval Acharya, after acquiring a bachelor’s degree in Hotel Management joined his father’s chain of vegetarian restaurants in Ahmednagar. Being young and enterprising, he suggested his father to add a new section of vegetarian bakery items which required an investment of ₹ 5 crores. His father Mr. Aariketh Acharya suggested him to take the decision with caution and understood everything comprehensively as bad decision may damage the financial fortune of business.
Identify the decision suggested by Mr. Aariketh Acharya. State by giving any three reasons as to why he must have advised his son to take decision with caution.
Which group consists of fixed assets?
What is fixed capital?
What are decisions about investment in long-term assets called?
Why do the large funds involved in capital budgeting require detailed analysis?
How does the Nature of Business affect fixed capital requirement?
