Question

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

OR
(b) Explain the following factors affecting the dividend decision of a company:
(i) Stability of dividends
(ii) Contractual constraints
(iii) Stock market reaction

Hint:

Working capital factors concern short-term liquidity, while dividend factors focus on shareholder value distribution.

Answer 1

(a):
(i) Operating Efficiency:
Inventory turnover ratio
Cash conversion cycle
Example: Dell's 5-day inventory vs industry average of 20 days
(ii) Credit Availed:
Supplier payment terms
Trade credit utilization
Impact: Longer terms reduce working capital needs
(iii) Level of Competition:
Price wars increase inventory requirements
Service competition raises receivables
Case: E-commerce companies' cash-on-delivery pressures
(b):
(i) Stability of Dividends:
Investor expectations
Signaling effect
Example: HUL's consistent dividend history
(ii) Contractual Constraints:
Loan covenant restrictions
Preferred stock terms
Legal capital requirements
(iii) Stock Market Reaction:
Dividend announcement impact
Clientele effect
Case: Apple's 2012 dividend resumption (7 percent stock rise)