Question

(a) Explain the following factors affecting the working capital requirements of a business:
(i) Operating efficiency
(ii) Credit availed
(iii) Level of competition

OR
(b) Explain the following factors affecting the dividend decision of a company:
(i) Stability of dividends
(ii) Contractual constraints
(iii) Stock market reaction

Hint:

Working capital factors concern short-term liquidity, while dividend factors focus on shareholder value distribution.

Answer 1

(a):
(i) Operational Efficiency:
Inventory Turnover Ratio
Cash Conversion Cycle
Illustration: Dell's 5-day inventory period compared to the industry norm of 20 days.
(ii) Credit Utilized:
Supplier payment conditions
Trade credit application
Consequence: Extended payment terms decrease working capital demands.
(iii) Competitive Intensity:
Price conflicts escalate inventory needs.
Service-based competition leads to higher receivables.
Scenario: E-commerce businesses facing cash-on-delivery obligations.
(b):
(i) Dividend Consistency:
Shareholder outlook
Signaling significance
Example: Hindustan Unilever Limited's uninterrupted dividend track record.
(ii) Contractual Limitations:
Restrictions imposed by loan agreements
Conditions for preferred shares
Statutory capital mandates.
(iii) Equity Market Response:
Effect of dividend declarations
Clientele impact
Instance: Apple's stock appreciation of 7 percent following its 2012 dividend reinstatement.