Justify the following statement.

Question 14 Marks

There are various factors affecting the requirement of working capital.

Answer

The nature and size of a business affect the requirement of working capital. Trading or merchandising firms and big retail enterprises need a large amount of capital compared to small firms which need a small amount of working capital.
If the period of the production cycle is longer then the firm needs more amount of working capital. If the manufacturing cycle is short, it requires less working capital.
During the boom period sales will increase leading to increased investment in stocks, thus requiring additional working capital and during the recession, it is vice versa.
Along with the expansion and growth of the firm or company in terms of sales and fixed assets, the requirement of working capital increases.
If there is proper coordination, communication, and co-operation between production and sales departments then the requirement of working capital is less.
A liberal credit policy increases the possibility of bad debts and in such cases, the requirement of working capital is high, whereas a firm making cash sales requires less working capital.

Question 24 Marks

Capital structure is composed of owned funds and borrowed funds.

Answer

Capital structure means to mix up of various sources of funds in desired proportions.
To decide capital structures means to decide upon the ratio of different types of capital.
A firm’s capital structure is the relation between the debt and equity securities that make up the firm’s financing of its assets.
The capital structure is composed of own funds which include share capital, free serves, and surplus, and borrowed funds which represent debentures, bank loans, and long-term loans provided by financial institutions.
Thus capital structure = Equity share capital + preference share capital + reserves + debentures.
Thus, it is rightly said that capital structure is composed of owned funds and borrowed funds.

Question 34 Marks

Fixed capital stays in the business almost permanently.

Answer

Factors determining fixed capital requirements are:Fixed capital refers to capital invested for acquiring fixed assets.
These assets are not meant for resale.
Fixed capital is capital used for purchasing land and building, furniture, plant, and machinery, etc.
Such cap al is usually required at the time of the establishment of a new company.
Existing companies may also need such capital for their expansion and development, replacement of equipment, etc.
Modern industrial processes require the increased use of heavy automated machinery. Thus, it is rightly said that fixed capital stays in the business almost permanently.

Question 44 Marks

There are various factors affecting the requirements of fixed capital.

Answer

Fixed capital being long-term capital is required for the development and expansion of the company.
The nature and size of a business have a great impact on fixed capital. Manufacturing businesses require huge fixed capital whereas trading organizations like retailers require less fixed capital.
Methods of acquiring assets on rentals or on a lease/installment basis will require less amount of fixed assets.
If fixed assets are available at low prices and concessional rates then it would reduce the need for investment in fixed assets.
International conditions and economic trends like a boom period will require high investment in fixed assets and a recession will lead to less requirement.
Similarly, consumer preferences, competition, and highly demanded goods and services will require a large amount of fixed capital. E.g. Mobile phones. Thus, it is rightly said that there are various factors affecting the requirements of fixed capital.

Question 54 Marks

The firm has multiple choices of sources of financing.

Answer

Business firms require finance in terms of working capital and fixed capital.
Funds are required at different stages of business.
The company can raise funds from various sources i.e. from internal and external sources.
Internal sources could be cash inflows on sales turnover, income from investments, and retained earnings.
External sources can be obtained for short-term requirements through cash credit, overdraft trade credit, discounting bills of Exchange issues of commercial paper, etc.
For long-term needs, a firm can meet its financing needs through the issue of shares, debentures, bonds, public deposits, etc. Thus, it is rightly said that the firm has multiple choices of sources of financing.

Question 64 Marks

Working Capital is also called circulating capital.

Answer

Working capital is required by the business to carry out day-to-day transactions.
Working capital helps the firm to maintain sufficient stock of raw material stock and finished goods.
Working capital can be funded with short-term loans, deposits, trade credit, etc.
It also helps the business to meet unexpected expenses. Thus, it is rightly said that Working Capital is also called circulating capital.

Question 74 Marks

Corporate finance deals with the raising and using of finance by a business corporation.

Answer

Business organisations require finance to start or expand their business.
The finance manager should ensure the finance required by the firm.
The right sources of fund should be identified that has minimum cost.
The funds raised must be utilized effectively.
Thus, it is rightly said that corporate finance deals with the raising and using of finance by a business corporation.

Secretarial Practice Justify the following statement.