Question

Explain the following factors affecting the requirement of fixed capital of a company: (i) Choice of technique (ii) Financing alternatives (iii)…

Accepted Answer

Factors affecting the Requirement of Fixed Capital: (i) Choice of Technique:  A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour.  Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower. (ii) Financing Alternatives:  When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it.  Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. (iii) Growth Prospects:  Higher growth of an organisation generally requires higher investment in fixed assets.  When such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital. OR (b) Q. Explain the following factors affecting choice of capital structure of a company (i) Cost of equity (ii) Control (iii) Stock market conditions (i) Cost of Equity:  When a company increases debt, the financial risk faced by the equity holders increases, so their desired rate of return may increase. It is for this reason that a company cannot use debt beyond a point.  If debt is used beyond that point, cost of equity may go up sharply and share price may decrease inspite of increased earning per share (EPS) (ii) Control:  Debt normally does not cause a dilution of control.  A public issue of equity may reduce the management’s holding in the company and make it vulnerable to takeover. (iii) Stock market conditions:  If the stock markets are bullish, equity shares are more easily sold even at a higher price.  During a bearish phase, a company, may find raising of equity capital more difficult and it may opt for debt.

Explain the following factors affecting the requirement of fixed
capital of a company :
(i)
Choice of technique
(ii)
Financing alternatives
(iii)
Growth prospects

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