Capital Budgeting- A very important topic most theory and numerical questions will be asked on this

Just for clarity no questions will be asked on above picture

Decision rule is important and target period is decided by company

Average investment formula could be asked directly

Initial cost plus installation expense is called as capital expenditure and Salvage
value is the estimated resale value of an asset at the end of its useful life. It is
subtracted from the cost of a fixed asset to determine the amount of the asset cost
that will be depreciated.
NPV is most important topic , calculated in terms of absolute value . Inflows are
discounted and then compare with outflow .
NPV And PI gives the same decision they are not contradictory.
In IRR the Discount Rate has to be calculated at which inflow is equal to outflow
(NPV=ZERO) so it is calculated from above formula i.e hit and trial method.

NPV at lower discount rate is higher and

NPV at higher discount rate is lower

Above four points are most important.
Long term bonds are called as Debt or Debentures

Perpetual Debt have no terminal value or redeemable value

Net proceeds is the amount that company got by issuing these Bonds
IN redeemable debt company has to give annual interest as well as cashflow on
maturity.

CFM= cash flow on maturity

Kd = cost of Debt

B0= net proceeds

In redeemable preference share company has to pay terminal value as well as

yearly interests but ib irredeemable preference share no terminal value
Questions are asked from 1,2,4 and 5

Ke= cost of equity share

P0 is market value of share

Pn= terminal value i.e on maturity how much you will get

Ke= expected rate of return

N= Time period
MM Model gives arbitrage method
Assumptions of MM model above
B= retention ratio i.e how much profit company is retaning

And r= rate of return i.e the profit that company has retained then how much return
can be taken out from it(i.e B)
Formulas are very important , questions are asked directly on formula and
numerical also come on this.

RESIDUAL THEORY OF DIVIDENDS

5) NO taxes and no floatation cost

Spe
culative – company donot want to miss opportunity

Compensative- minimum balance etc.

Very imp. Formula