Question

Explain the following factors affecting the working capital requirements of a company: (i) Scale of operations (ii) Credit allowed (iii) Level of…

Accepted Answer

Factors affecting the working capital requirements of a company: • (i)Scale of operations: Organisations with large scale operations require high levels of • inventory and debtors. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a smaller scale. • (ii) Credit allowed: Different firms allow different credit terms to their customers, depending upon the level of competition as well as the credit • worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital. • (iii) Level of competition: Higher level of competitiveness may necessitate larger stocks of • finished goods to meet urgent orders from customers. This increases the working capital requirement. • (iv) Production cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Duration and • length of production cycle affects working capital required. Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle. OR Factors affecting dividend decision of a company: • (i)Taxation policy: If tax on dividend is higher, it is better for the company to pay • less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. • (ii) Stock market reaction: Stock prices react positively to the news of increase in dividend • and share prices react negatively to decrease in dividend. Thus, the possible impact of dividend policy on the equity share price has to be considered. (iii) Access to capital market: • Large and reputed companies depend less on retained earnings to finance their growth as they have easy access to the capital market. • Such companies pay higher dividends than the smaller companies which have relatively low access to the market. (iv) Contractual constraints: • Sometimes the lender impose certain restrictions on the payment of dividends in future, while granting loans to a company. • The companies are required to ensure that the dividend does not violate the terms of the loan agreement in this regard.

Explain the following factors affecting the working capital
requirements of a company:
(i)
Scale of operations
(ii)
Credit allowed
(iii)
Level of competition.
(iv)
Production cycle

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