these files is releted to the mba

1.  Deshmukh Machindra
 Shinde Mahesh
 Jadhao Vaibhav
 Patil Gajanan
 Shaikh Yasar
Financial Management
Second chapter
Investment Decisions

2. 1) Capital Structure:-
Meaning
Capital Structure Theories
Factors Determining Capital Structure
2) Cost of Capital:-
Meaning
Importance of Cost of Capital
Classification of Cost of Capital
Determination of Cost of Capital
3) Capital Budgeting:-
Meaning
Significance of Capital Budgeting
Capital Budgeting Process
4) Capitalization:-
Overcapitalization
Undercapitalization

3.  Capital structure :-
An organization needs capital to invest in various
projects for the purpose of earning profit. It can raise
capital from numerous sources, such as issuing equity
shares. Preference share, or debentures. The capital
structure refers to the combination of different sources
of capital used by the organization to finance it's
activities.

4. A) Modern Theory :-
Net income approach
. Net income operating approach.
Modigliani and Miller approach
B) Traditional approach

5. Definition:-
Proposed in this theory that," there exists a
direct relationship between the capital structure
and valuation of the firm and cost of capital."
David Durand

6.  There are no taxes.
 The cost of debt is less than cost of equity.
 The risk associated with debt does not affect
the perception of investors.
 The cost of debt and equity remains constant.

7. Definition :-
David Durand also gave the NOIA, which states
that, " The valuation of the firm and it's cost of capital
are independent of its capital structure."

8.  The overall cost of capital remain constant for
any financing mix.
 The market value of an organization depends
upon its Net Operating Income and not on
pattern financing.
 The advantage of debts is reversed by an
increase in the cost of equity capital.
 The cost of debt is constant.

9.  According to this approach, the value of
organization and cost of capital are independent
from its capital structure. As per the M-M approach,
if the organization raises more debt capital as
compared to equity capital, it implies that the
organization is running on high risk. However at the
same time, organization is also earning high profit.

10.  It stands between the net income approach and the
net operating income approach. Therefore, the
traditional approach is also called intermediate
approach. In this approach, when debt capital is
introduced up to a certain limit, then it is assumed
that debt capital would increase EPS by decreasing
overall cost of capital and increasing the value of an
organization.

11.  FACTORS INFLUENCING
1.CONTROL INTERESTS
According to this factor, at the time of preparing capital structure,
it should be ensured that the control of the existing shareholders
(owners) over the affairs of the company is not adversely affected.
If funds are raised by issuing equity shares, then the number of
company’s shareholders will increase and it directly affects the
control of existing shareholders. In other words, now the number
of owners (shareholders) controlling the company increases.
2.RISKS
The economy where a firm conducts business is also subject to
unforeseen risks. In the contemporary business world, size no
longer assures economic
survival. Therefore, finance executives attempt to consider every
possibility imaginable to mitigate negative economic events.

12. 3.TAX CONSIDERATION
Debt payments are tax deductible. As such, if a company's tax rate is
high, using debt as a means of financing a project is attractive because
the tax deductibility of the debt payments protects some income from
taxes.
4.COST OF CAPITAL
Cost of capital determines the type of securities to be issued. During
depressions it is better to raise capital structure through preference shares
and debentures and during boom equity shares are better.
5.FLEXIBILITY
The firm while deciding the capital structure shall ensure flexibility in
its capital structure. The capital structure should be such that it always
provides scope for raising funds through debts.

13. 6.INVESTORS ATTITUDE
Attitudes of investors is another factor which determines the equities to
be issued. The investors may be venturesome or cautious or less
cautious. Equity shares can best to be invested to investors who are
venturesome because they are prepared to take risks.
7.LEGAL PROVISIONS
While determining capital structure the company should take care of the
relevant provisions of various law framed by the government from time
to time. It should also take case of norms set by financial institutions
,SEBI , stock exchange etc.
8.GROWTH RATE
Firms that are in the growth stage of their cycle typically finance that
growth through debt, borrowing money to grow faster. The conflict that
arises with this method is that the revenues of growth firms are typically
unstable and unproven. As such, a high debt load is usually not
appropriate.

14. 9.MARKET CONDITIONS
Market conditions can have a significant impact on a company's
capital-structure condition. Suppose a firm needs to borrow funds for a
new plant. If the market is struggling, meaning investors are limiting
companies' access to capital because of market concerns, the interest rate
to borrow may be higher than a company would want to pay. In that
situation, it may be prudent for a company to wait until market
conditions return to a more normal state before the company tries to
access funds for the plant.
10.PROFITABILITY
While deciding or planning capital structure ,the firm should keep the
objective of maximizing the shareholders wealth. The firm shall work
out proper EBIT EPS analysis. Then only it can select that combination
which gives highest value of EPS for a given level of EBIT.

15. 11. FLOATATION COSTS
Floatation costs are those expenses which are incurred while issuing
securities (e.g., equity shares, preference shares, debentures, etc.). These
include commission of underwriters, brokerage, stationery expenses, etc.
Generally, the cost of issuing debt capital is less than the share capital.
This attracts the company towards debt capital.
12.COST OF DEBT
The capacity of a company to take debt depends on the cost of debt. In
case the rate of interest on the debt capital is less, more debt capital can
be utilized and vice versa.
13. COST OF EQUITY CAPITAL
Cost of equity capital (it means the expectations of the equity
shareholders from the company) is affected by the use of debt capital. If
the debt capital is utilized more, it will increase the cost of the equity
capital. The simple reason for this is that the greater use of debt capital
increases the risk of the equity shareholders.

16. 14.GOVERNMENT POLICIES
Capital structure is also influenced by government regulations. For
instance, banking companies can raise funds by issuing share capital
alone, not any other kind of security. Similarly, it is compulsory for other
companies to maintain a given debt-equity ratio while raising funds.

17. Introduction :
Cost Of Capital from three viewpoints is given below :
The Investors view point :- It may be defined as "the
measurement of the sacrifice made by him/her in order to
capital formation.
The firms view point :- It is the minimum required rate of
return needed to justify the use of capital.

18. Capital Expenditures view point :- The cost of capital is the
minimum required rate of return or the hurdle rate or target
rate or cut off rate or any discount rate used to value cash
flow.

19. The decision in which it is usefull are :
1) Designing Optimal Capital Structure :- Cost of capital is
helpful in formulating a sound and economical capital structure
for a firm. The debt policy of a firm is significantly influenced
by the cost consideration.
2) Investment (capital Budgeting) Evaluation:- Wilson
R.M.S.states the cost of capital is the concept, which should be
expressed in qualitative terms of it is to be useful, as a cut off
rate for capital expenses.

20. 3) Financial Performance Appraisal :- cost of capital framework can be
used to evaluate the financial performance of top management.
Classification of Cost of Capital
1) Marginal Cost of capital
2) Average Cost
3) Historic Cost
4) future cost
5) specific Cost
6) spot Cost
7) opportunity Cost:- It is the benefit that the share holder
forgoes by not putting his or her funds elsewhere because they
have been retained by the management

21. 8) Explicit Cost :- Cost of Capital can be explicit or implicit.
Knowing the distinction between explicit and implicit is
important from the point of view of computation of cost of
capital.
9) Implicit Cost:- It is the opportunity cost, which is given up
in order to pursue a particular action. It is also known as
implicit cost of capital.

22. The components of a specific source of capital is equal
to the investors required rate of return and it can be
determined by using equation.
1) Cos of Debt
a) Debt issued at par
b) Debt Isse at premium

23. 2) Cost Of Preference Capital
a) Irredeemable Preference Share
b) Redeemable Preference share
3) Cost of Equity :- Firms may rais equity internal by retained
earnings. Alternatively, they could distribute the entire
earnings to equity shareholders and raise equity capital
externally by issuing new shares.

24.  Meaning:
Capital budgeting may be defined as "the firm's
decision to invest it's current funds most efficientaly in
the long-term assets in anticipation of an expected flow
of benefits over a series of year.

25. 1) Growth :- Fixed Assets are earning assets, since they have
decisive influencing on the rate of Return Of The growth.
2) More Risk :- Investment in long-term assets increases
average profit but it may lead to fluctuations in its earning,
then the firm will become more risky.
3) Huge Investment :- long-term assets involve more initial
cash outflows, which make the firm imperative to plan
investment program very carefully and make an advance
arrangement of funds either from internal or external or both
sources.

26. 4) Irreversibility :- Long-term assets investment decisions are
not easily reversible without much financial loss to them; due
to the difficulty in finding a market for such used capital
items.
5) Effect on other Projects :- Whenever there is investment in
long-term assets under expansion programme, it's cash flows
affect the project under consideration, if it is not
economicaly independent.

27. 1) Idea Generation :- The search for promising project
ideas is the first step in the capital budgeting process. In
other words, the planning phase of a firms capital
budgeting process is concerned with articulation of its
broad investment strategy and the generation and
preliminary search of project proposals.

28. 2) Evaluation of Analysis :- In this preliminary screening when
a project proposal suggest that the project is Prima facie
worthwhile, then it is required to go for evaluation. Analysis
has to done from the aspects like, marketing, technical,
financial, economic, and ecological analysis.
3) Selection :- Selection or rejection of a project follows
analysis phase. Projects are evaluated by using a wide range of
evaluation techniques, which are divided into traditional and
modern. Selection or rejection of a project depends on the
techniques used to evaluate and it's acceptance rule.

29. 4) Financing the Selected project :-After the selection project,
the next step is financing. Generally the amount required us
known after selection of the project. Under this phase
financing arrangement have to be made.
5) Execution or implementation:- Planning is the paper work
and implementation is physically implementing the selected
project.
6) Review of the Project :- Once the project is converted
from paper work to concrete work, then there is a need to
review the project

30.  Accounting rate of return
 Payback period
 Internal rate of return

31. It is the process of determining long term capital
requirements of an organization. It includes
procurement of capital from various sources, such as
shares, debentures, and reserve bonds.
An organization can face the situation of under
capitalization and over capitalization.

32. It is a condition when an organization raises more
capital than its requirement. The major causes of over
capitalization are as follows.
1) High Promotion Cost
2) Purchase of Assets at higher proces
3) Inadequate Provision for Depreciation
4) Liberal Dividend Pokicy
5) Over estimation of earning

33. It is a situation of an organization earns exceptionaly high
profit as compared to the other organizations operating in
the same industry.
Some Reasons:-
1) Raising less funds due to underestimation of capital needs
2) Undervaluing assets and setting a high rate of
depreciation