Question

Given the current COVID 19 situation, do you think that managers are currently more worried about the cost of capital or the future availability of capital? What influences related to the present situation would influence the firms needed cash positions and use of debt or equity? How is the current situation influencing the firm's capital budgeting decisions?

Answer 1

Given the current situation and due to the adverse impact on market due to ongoing COVID 19 pandemic, peresently the managers are more worried about the availability of the capital funds to carry out the operations. Due to the lockdown most of the companies have consumed most of their surplus working capital funds with generation of any revenue and collection of payments, their is accute working capital crunch which most of the companies are facing. Due to ongoing situation most of the firm needs cash to procure inventory to restart their operations and for payment of expenses like power, rent and other incidental expenses to restart the operations.

The governments and central banks have considerable reduced interest rates to boast demand and increase borrowing accross different sectors so as to bring economies back on track. As a result most of the managers are taking prudent calls and choosing use of debt as source of cash in camparison to equity so as to decrease their overall cost of funds. further the current situation also warrants to rethink about various decisions relating to capital investing and budgeting.

Most of the companies are reluctant to invest in new projects as their dont foresee and increase in demand in near future. bulk of the companies are doing CAPEX only to debottle neck their existing units.