question_answer 28)

Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer.

Answer:

The working and fixed capital requirement of 'S' Limited will be high due to the following reasons (i) The business is capital intensive and the scale of operation is large. (ii) Heavy investments are required for building up the production base and for technological up gradation. (iii) In case of steel industry, the major input is iron ore and coal. The ratio of cost of raw material to total cost is very high. Hence, higher will be the need for working capital. (iv) The longer the operating cycle, the larger is the amount of working capital required as the funds get locked up in the production process for a long period of time. (v) Terms of credit for buying and selling goods, discount allowed by suppliers and to the customers also determines the quantum working capital.