Read the following passage carefully and answer the given questions.
Arun wants to open a retail mart. He is thinking over the selection of the best financing alternative. He made an estimation that Rs. 40 lakhs, is an adequate amount of money to start the venture. He is planning to finance the business by investing Rs. 25 lakhs of his own money and the rest would be financed by debts. He is very careful about the future cash-flow in the business because the cost of raising funds from external sources is significant. He is working out to ensure that enough funds are available at the right time. If adequate funds are not available, the firm will not be able to honour its commitments and carry out its plans. On the other hand, if excess funds are available, it will unnecessarily add to the cost and may encourage wasteful expenditure. Since it will be a trading business, it needs lower investment in fixed assets. Since Arun is planning to initiate the business from a small level, the quantum of inventory and debtors required is generally low.
What would be the total capital requirement of the business?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 40,00,000
Formula: Total capital = Owners’ funds + Borrowed funds
So: Borrowed funds = Total capital − Owners’ funds
Values: Total capital = Rs. 40 lakhs (Arun’s estimate in the passage); Owners’ funds = Rs. 25 lakhs
Working: Borrowed funds = 40 − 25 = 15 lakhs. Total capital = 25 + 15 = 40 lakhs = Rs. 40,00,000
NCERT (2026-27 Edition): “Capital Structure One of the important decisions under financial management relates to the financing pattern or the proportion of” “the use of different sources in raising funds. On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., ‘owners’ funds’ and ‘borrowed funds’. Owners’ funds consist of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits etc. …” “…Capital structure refers to the mix between owners and borrowed funds.” |