CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Mehta Industries has annual sales of Rs 36 crore and expects its working capital requirement to be 25% of projected annual turnover under the Nayak Committee turnover method. The promoter's minimum margin is 5% of turnover. The maximum bank finance (in Rs crore) is:
The maximum bank finance is Rs 7.2 crore. Working capital need is 25% of Rs 36 crore, or Rs 9 crore. The promoter must contribute 5% of turnover, Rs 1.8 crore, so the bank finances the balance of Rs 7.2 crore, equal to 20% of turnover.
- A9.0
- B7.2Correct
- C1.8
- D10.8
Explanation
Working capital requirement = 25% x 36 = 9 crore. Minimum margin from the borrower = 5% x 36 = 1.8 crore. Bank finance = 9 - 1.8 = 7.2 crore. Check: 20% of turnover = 0.20 x 36 = 7.2. Option 9.0 ignores the promoter's margin.
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