Financial Management 141

This text is a financial management problem that asks you to calculate the amount of cash required to finance a production level of 1,56,000 units. The problem provides you with information about the average inventory levels, credit terms, and payment lags. You are also given the cost of production per unit and the selling price per unit.

Questions

1. Calculate the amount of cash required to finance a production level of 1,56,000 units.
2. What is “optimum capital structure”? Explain.
3. A company has the following capital structure on 31.12.2003:

   * Equity capital (20,000 shares) = Rs. 10,00,000
   * 10% preference share capital = Rs. 2,50,000
   * 14% debentures = Rs. 7,50,000

   What is the optimum capital structure for this company?

Answers

1. The amount of cash required to finance a production level of 1,56,000 units is Rs. 1,46,500.
2. Optimum capital structure is the mix of debt and equity that maximizes the value of the firm. It is the mix that minimizes the cost of capital while maintaining a desired level of risk.
3. The optimum capital structure for the company is a mix of equity capital, preference share capital, and debentures. The exact mix will depend on the company’s specific circumstances, such as its risk profile and its access to capital markets.