CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Arjun Traders has current assets of ₹80,00,000 and current liabilities other than bank borrowings of ₹20,00,000. Under the second method of lending (Tandon Committee), what is the maximum permissible bank finance?
The maximum permissible bank finance is ₹40,00,000. Under the second method it equals 75% of current assets, which is ₹60,00,000, less current liabilities other than bank borrowings of ₹20,00,000. This leaves the borrower contributing the balance from long-term funds.
- A₹15,00,000
- B₹40,00,000Correct
- C₹45,00,000
- D₹60,00,000
Explanation
Second method: 75% of current assets minus other current liabilities = 0.75 × 80,00,000 = 60,00,000; less 20,00,000 = 40,00,000. The option ₹15,00,000 comes from taking 25% of the working capital gap of ₹60,00,000 (first method). ₹60,00,000 forgets to deduct current liabilities.
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