Question

Explain the following factors affecting the fixed capital requirements of a company: (i) Nature of Business (ii) Choice of Technique (iii) Growth…

Accepted Answer

Factors affecting the fixed capital requirements of a company: • (i) Nature of Business: A trading concern needs lower investment in fixed • assets compared with a manufacturing organization. As a trading concern does not require to purchase plant and machinery etc. • (ii) Choice of Technique: A capital-intensive organisation requires higher investment in plant and machinery, thus the requirement of fixed capital for such organisations • would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower. • (iii) Growth Prospects: When a company expects higher growth in the future, it creates higher capacity in order to meet the • anticipated higher demand quicker. This requires larger investment in fixed capital. OR Factors affecting financing decision of a company: • (i) Fixed Operating Costs: If a business has high fixed operating cost it must reduce fixed financing costs. Hence, lower debt • financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred. (ii) Control Considerations: • 13 Issue of more equity may lead to dilution of • management’s control over the business. Debt financing has no such implication. • (iii) State of Capital Market: During the period when stock market is rising, more • people invest in equity. However, depressed capital market may make issue of equity shares difficult for any company.

Explain the following factors affecting the fixed capital
requirements of a company:
(i)
Nature of Business
(ii)
Choice of Technique
(iii)
Growth Prospects

Marking-scheme solution

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