CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Kaveri Textiles has current assets of Rs 80 lakh and current liabilities (other than bank borrowings) of Rs 20 lakh. Under the second method of lending of the Tandon Committee, the maximum permissible bank finance is:
MPBF under the second method is Rs 40 lakh. Take 75% of current assets, which is Rs 60 lakh, and subtract other current liabilities of Rs 20 lakh. The borrower's own long-term funds must cover the remaining 25% of current assets.
- ARs 45 lakhCorrect
- BRs 40 lakh
- CRs 60 lakh
- DRs 15 lakh
Explanation
Second method: MPBF = 75% of current assets - other current liabilities = 60 - 20 = Rs 40 lakh. Check: 25% of 80 = 20 lakh is the borrower's minimum margin; 80 - 20 - 20 = 40. Rs 45 lakh results from using the first method: 75% of the gap (60) = 45.
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