Question

Explain how the following factors affect the working capital requirement of a business: (i) Seasonal factors (ii) Inflation OR Explain how the…

Accepted Answer

Factors affecting the working capital requirement of a business are: • (i) Seasonal factors: In peak season, larger amount of working capital is required • because of higher level of activity. During lean season, the level of activity as well as the requirement for working capital is lower. • (ii) Inflation: With rising prices, larger amounts are required even to maintain • a constant volume of production and sales. Working capital requirement of a business, thus become higher with higher rate of inflation. OR Q(b). Explain how the following factors affect the choice of capital structure of a company: (i) Floatation costs (ii) Stock market conditions Factors affecting the choice of capital structure of a company are: • (i) Floatation costs: Public issue of shares and debentures requires considerable • expenditure. Getting a loan from a financial institution may not cost so much. • (ii) Stock market conditions: Use of equity is preferred by companies when the stock markets are bullish, as equity shares are more easily sold even at a • higher price. However, during a bearish phase, a company may opt for debt.

Explain how the following factors affect the working capital
requirement of a business :
(i)
Seasonal factors
(ii)
Inflation

Marking-scheme solution

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(a)OR(b)Explain how the following factors affect the working capitalrequirement of a business :(i)Seasonal factors(ii)InflationExplain how the following factors affect the choice of capitalstructure of a company :(i)Floatation costs(ii)Stock market conditions

Marking-scheme solution

More from Financial Management

Explain how the following factors affect the working capital
requirement of a business :
(i)
Seasonal factors
(ii)
Inflation