CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Under the Tandon Committee's second method of lending, the borrower must finance at least 25% of total current assets from long-term sources. Vikram Components has current assets of ₹80 lakh and current liabilities (excluding bank borrowings) of ₹20 lakh. What is the maximum permissible bank finance (MPBF)?
MPBF is ₹40 lakh. In the second method the borrower funds 25% of current assets, so the bank can finance 75% of ₹80 lakh, which is ₹60 lakh, less current liabilities other than bank borrowings of ₹20 lakh. That leaves ₹40 lakh.
- A₹40 lakhCorrect
- B₹45 lakh
- C₹60 lakh
- D₹20 lakh
Explanation
Method 2: MPBF = 75% of current assets − other current liabilities = 0.75 × 80 − 20 = ₹40 lakh. The ₹45 lakh option is the first method, 75% × (80 − 20). The ₹60 lakh option is the whole working capital gap, 80 − 20.
Did you get it right without looking?
One question tells you little. A timed set on Financing of Working Capital shows your real accuracy, how long you take and where you lose marks.
More Financing of Working Capital questions
- The projected figures of Sundaram Engineering for the next year are: total current assets ₹600 lakh; current liabilities other than bank bor…
- Kaveri Industries issues 90-day commercial paper of face value ₹100 lakh at a discount, so that the issue price is ₹97.50 lakh. Ignoring iss…
- Verma Industries has a cash credit limit of ₹50 lakh. During the year its average utilisation was ₹32 lakh. The bank charges interest at 10%…
- Which of the following is a feature of a cash credit facility granted by a bank to a business for financing working capital?
- Mehta Industries has annual credit sales of Rs 7.2 crore (360 days). A factor will advance 80% of receivables, charging 12% p.a. interest on…
- Under the Tandon Committee's norms for bank finance of working capital, which method requires the borrower to contribute at least 25% of tot…