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Capital Structure Theories^327







• (^) =-
  This means X = Rs. 0.65 million

4. The total cash available for servicing the debt will be equal to:

Rs 0.65 million (cash available from operations)

Rs. 1.26 million (initial cash balance)

= Rs. 1.91 million.

5. The level of debt that can be serviced with Rs. 1.91 million is as follows:

Amount Annual fixed charges

Rs. 5.00 million 0.25 ◊ 5.00 = Rs. 1.25 million

Rs. 2.54 million 0.26 ◊ 2.54 = Rs 0.06 million

Rs. 7.54 million Rs. 1.91 million

Inventory of Resources

Normally, when a firm's debt capacity is being assessed, certain coverage ratios, as
discussed above, are looked into. In addition, firms resorting to more sophisticated
analysis try to estimate the likelihood of cash insolvency (or cash inadequacy under
recessionary conditions for different levels of debt for establishing their? debt, capacity
it would be helpful to supplement such analyses by estimating potential sources of
liquidity available to the firm to meet possible cash drains. These sources, as suggested
by Gordon Donaldson, may be divided into three categories:

Uncommitted Reserves These are reserves maintained primarily as an

insurance against adverse developments and not earmarked for any specific

purpose. Usually these reserves can be tapped at a relatively short notice.

Reduction of Planned Outlays Resources may be made available by effecting

reductions and cuts in proposed outlays and disbursements. Typically such reductions

and cuts, while they release resources, tend to impair the profitability

Liquidation of Assets In order to tide over an unmanageable drain of cash, the

firm may raise resources by iiquidat;ng some of its assets.

Following Table drawn from an article written by Gordon Donaldson' shows the above
mentioned categories along, with their subclassifications.