Question

Explain the following factors affecting the working capital requirements of a business: (i) Credit allowed (ii) Production cycle (iii) Availability…

Accepted Answer

(i) Credit allowed § Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces 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. (ii) Production cycle § Production cycle is the time span between the receipt of raw material and their conversion into finished goods. § Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle. (iii) Availability of raw material § If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. § If, however, raw materials do not have a record of uninterrupted availability, higher stock levels may be required. OR Q. (b) Explain the following factors affecting the dividend decision of a company: (i) Growth opportunities (ii) Cash flow position (iii) Shareholders’ preference (i) Growth opportunities § Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. § The dividend in growth companies is, therefore, smaller, than that in the non– growth companies. (ii) Cash flow position § The payment of dividend involves an outflow of cash. § A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend. (iii) Shareholders’ preference § There are always some shareholders who depend upon a regular income from their investments. § If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.

Explain the following factors affecting the working capital
requirements of a business :
(i)
Credit allowed
(ii)
Production cycle
(iii)
Availability of raw material

Marking-scheme solution

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