Question

Explain the following factors affecting the working capital requirements of a business: (i) Operating efficiency (ii) Credit availed (iii) Level of…

Accepted Answer

24 Q. (i) Operating Efficiency § Firms manage their operations with varied degrees of efficiency. § These efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital. (ii) Credit availed § A firm allows credit to its customers and also may get credit from its suppliers. § To the extent the firm avails credit on purchases, the working capital requirement is reduced. (ii) Level of competition § Level of competition affects the working capital requirement of an organisation as higher competition requires larger stocks to meet urgent orders from customers which results into requirement of more working capital. § Competition may also force the firm to extend liberal credit terms. OR Q. (b) Explain the following factors affecting the dividend decision of a company: (i) Stability of dividends (ii) Contractual constraints 25 Q. (iii) Stock market reaction (i) Stability of dividends § Companies follow a policy of stabilizing dividend per share. The increase in dividend is generally made when there is confidence that their earning potential has gone up and not just the earning of the current year. § Companies do not alter dividend per share if the change in earnings is small or seen to be temporary in nature. (ii) Contractual constraints § Sometimes the lenders may impose some restrictions on the payment of dividend in future. § The companies are required to ensure that the payment of dividend does not violate the terms of the loan agreement entered by the company. (iii) Stock market reaction § Investors, in general, view an increase in dividend as good news and stock prices react positively to it. § The possible impact of dividend policy on the equity share price is one of the important factors considered by the management while taking a decision about dividend.

Explain the following factors affecting the working capital
requirements of a business:
(i)
Operating efficiency
(ii)
Credit availed
(iii)
Level of competition

Marking-scheme solution

More from Financial Management