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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Rao Traders has a working capital gap (current assets minus current liabilities other than bank borrowings) of Rs 60 lakh, and current assets of Rs 100 lakh. Under Tandon Committee Method I, the maximum permissible bank finance (in Rs lakh) is:

The maximum permissible bank finance is Rs 45 lakh. Method I allows the bank to lend 75% of the working capital gap, so 75% of Rs 60 lakh is Rs 45 lakh, while the borrower contributes the remaining 25% from long-term funds.

  1. A35
  2. B45Correct
  3. C50
  4. D15

Explanation

Method I: bank finances 75% of the working capital gap, so 0.75 x 60 = 45 lakh. Check: the borrower's margin is 25% of 60 = 15 lakh, and 60 - 15 = 45. Using 25% of current assets (25 lakh) as margin gives 35, which is the Method II answer and therefore wrong here.

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