Question

Explain the following factors affecting the working capital requirement of a company: (i) Level of competition (ii) Production cycle (iii) Scale of…

Accepted Answer

Level of competition  An organisation facing tough competition need large amount of working capital to maintain larger inventories.  Competition may also force the firm to extend liberal credit terms. Production Cycle  It is the time span between the receipt of raw material and their conversion into finished goods.  Any organisation having longer processing cycle needs larger amount of working capital as compared to the organisations having shorter processing cycles. Scale of Operations  An organisation operating on a higher scale of operation requires larger amount of working capital as in this case the quantum of inventory and debtors is generally high.  Such organisations require large amount of working capital as compared to the organisations which operate on a lower scale. OR (b) Q. Explain the following factors affecting dividend decision of a company (i) Taxation policy (ii) Access to capital market (iii) Contractual constraints. (i) Taxation policy If the dividend distribution tax is levied on the companies is higher it would be better to declare less dividend and vice- versa. (ii) Access to capital market A company having easy access to capital market is a better position to declare higher dividend and vice-versa. (iii) Contractual constraints Sometimes restrictions are imposed by the lenders on the payment of dividend in future and companies have to ensure that these restrictions are not violated.

Explain the following factors affecting the working capital
requirement of a company :
(i)
Level of competition
(ii)
Production cycle
(iii)
Scale of operations

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