Advertisements
Advertisements
Question
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.
Advertisements
Solution
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.
APPEARS IN
RELATED QUESTIONS
Explain briefly any four factors that affect the working capital requirement of a company.
Explain the following as factors affecting the requirements of fixed capital:
Technology upgradation
Varunica Ltd., a reputed truck manufacturing company, needs rupees twenty crores as additional capital to expand its business. Mr. Alind Jindal, the CEO of the company, wants to raise funds through equity. The Finance Manager, Mr. Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege to subscribe to new issue of shares as per the terms and conditions of the company which was agreed by Mr. Alind Jindal.
Name the method through which the company decided to raise additional capital.
State, with reason, whether the following statement is True or False.
Requirement of working capital does not depend upon any factor.
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? Discuss five important determinants of working capital requirement?
What is meant by capital gearing ratio?
Why is working capital also known as circulating capital?
Companies with a higher growth potential are likely to
Higher dividend per share is associated with
A fixed asset should be financed through
Current assets of a business firm should be financed through
What are the important determinants of working capital requirement?
Which of the following factors highlight the importance of capital budgeting decisions
______ involve identifying various sources of funds and deciding the best combination for raising the funds.
______ decision involves the decision regarding the distribution of profit or surplus of the company.
Assertion (A): A commercial bill is a bill of exchange used to finance the working capital requirements of business firms.
Reason (R): Commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms.
