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Question
Explain the following as factors affecting the requirements of working capital:
Nature of business
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Solution
Working capital refers to current assets which help in day-to-day business operations.
Nature of business: A company which deals in trading or services will require low working capital because it manages a small operating cycle and absence of processing. On the other hand, a company manages a large operating cycle will require high working capital as the conversion of raw materials into the finished product before the end of sale transaction.
Manufacturing organisations ⇒ High working capital
Trading/Service organisations ⇒ Low working capital
RELATED QUESTIONS
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 |
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d. Debentures |
4. Current Account |
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e. Return on shares |
5. Application Money |
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6. Dividend |
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7. Investment in current assets |
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8. Borrowed capital |
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9. Savings Account |
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10. Registered Document |
Explain the following as factor affecting the requirements of fixed capital:
Scale of operations
Explain the following as factor affecting the requirements of fixed capital:
Choice of technique
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:
Production cycle
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’.
What is working capital? Discuss five important determinants of working capital requirement?
Fixed Capital Working Capital
Current assets of a business firm should be financed through
What are the important determinants of working capital requirement?
______ 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.
______ decision involves the decision regarding the distribution of profit or surplus of the company.
Net working capital may be defined as the:
Fixed capital is financed through:
Read the following text and answer the following question on the basis of the same:
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax-deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
"Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)." The proportion of debt in the overall capital is called ______.
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.
