Read the following case study and answer question.

Aninjey is a CEO of Alfa Ltd. He is running a shoe business where his company is manufacturing canvas shoes, made up of breathable t-shirt fabric. His business is having a good liquidity position. He has already issued 200 equity shares earlier and has a company policy of paying regular dividends to its shareholders. He wants to expand his business and for that he required 100 crores. He asked his Finance Manager to prepare a financial blueprint of the same in order to have the right debt-equity ratio, so that a right financial balance can be maintained.

"Alfa Ltd. is manufacturing firm," Identify the factor affecting fixed capital highlighted in the statement.

Nature of Business

The correct answer is option (2)- Nature of Business.

The factor affecting fixed capital highlighted in the statement is Nature of Business.

Alfa Ltd. is a manufacturing firm that produces canvas shoes. The nature of the business involves significant investments in physical assets such as machinery, equipment, and inventory, all of which require fixed capital. The need for "100 crores" to expand the business and maintain a suitable debt-equity ratio also reflects the capital-intensive nature of the manufacturing industry, which typically requires large amounts of fixed capital for growth and operations.

Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery, etc.

OTHER OPTIONS

• Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower.

• Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business.

• Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital.