Question

Explain the following factors affecting the working capital requirements of a business: (i) Inflation (ii) Business cycle (iii) Nature of business OR…

Accepted Answer

(i) Inflation § With rising prices, larger amounts are required even to maintain a constant volume of production and sales. § The working capital requirement of a business thus, become higher with higher rate of inflation. (ii) Business cycle § In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. § During the period of depression, the requirement for working capital will be lower as the sales as well as production will be small. (iii) Nature of business § Trading organisations require lesser working capital than manufacturing organisations as there is no processing involved. § Service industries require the least working capital as they do not have to maintain inventory. OR Q. (b) Explain the following factors affecting the dividend decision of a company: (i) Access to capital market (ii) Legal constraints (iii) Taxation policy (i) Access to capital market § Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earning to finance their growth. § These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market. (ii) Legal constraints § Certain provisions of the Companies Act place restrictions on payouts as dividend. § Such provisions must be adhered to while declaring the dividend. (iii) Taxation policy § If tax on dividend is higher, it is better to pay less by way of dividends. § As compared to this, higher dividends may be declared if tax rates are relatively lower.

Explain the following factors affecting the working capital
requirements of a business:
(i)
Inflation
(ii)
Business cycle
(iii)
Nature of business

Marking-scheme solution

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(a)OR(b)Explain the following factors affecting the working capitalrequirements of a business:(i)Inflation(ii)Business cycle(iii)Nature of businessExplain the following factors affecting the dividend decision of acompany:(i)Access to capital market(ii)Legal constraints(iii)Taxation policy

Marking-scheme solution

More from Financial Management

Explain the following factors affecting the working capital
requirements of a business:
(i)
Inflation
(ii)
Business cycle
(iii)
Nature of business