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MS- 42: Capital Investment and Financing Decision
ASSIGNMENT
Course Code : MS-42
Course Title : Capital Investment and Financing Decision
Assignment Code : MS-42/TMA/SEM-I/2015
Coverage : All Blocks
Note: Attempt all the questions and submit this assignment on or before 30th April, 2015 to the coordinator of your study center.
Q.1.What do you understand by Economic Appraisal of a project? Discuss the various aspectsof economic appraisal and explain their significance.
Answer:Economic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and satisfying requirements for decision accountability. It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other
Q.2.What do you understand by Financial Reconstmction? How does it differ from reorganization of Capital? Discuss the steps involved in the formulation of Reconstruction Plan for a company.
Although the RFC was intended to only stay in operation for 10 years following its inception, the agency lasted until 1957. During that time the RFC expanded its authority to include making loans to farmers, railroads, companies and even created eight subsidiaries to aid in the wartime effort during World War II.
Answer:The Board for Industrial and Financial Reconstruction (BIFR) is an agency of the government of India, part of the Department of Financial Services of the Ministry of Finance. Its objective is to determine sickness of industrial companies and to assist in reviving those that may be viable and shutting down the others.An agency created by the the U.S. government to aid the troubled banking sector in the years following the stock
Q.3. List the various instruments through which corporate can procure finance and discuss the circumstances under which they are used to procure finance.
Answer:Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as ‘sponsors’, as well as a ‘syndicate’ of banks or other lending institutions that provide loans to the operation. They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling.
Q.4.What is meant by cost of capital for a firm? What is its relevance in investment decision making? How is it calculated for different sources of capital‘?
Answer:The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.
Q.5. What are the factors which influence dividend decisions? Explain Gordon’s model relating to dividend policy.
Answer:Main factors that influence the dividend decisions are as follows:
The corporate, institutional and legal factors that influence the dividend decision of a firm include the growth and profitability of the firm its liquidity position, the cost and availability of alternative forms of financing concerns about the managerial control of the firm, the existence of external (largely legal) restriction and the impact of inflation of cash flow.
Growth and Profitability:The amount of growth a firm can sustain and its profitability is related to its dividend decisions, so long as the firm (because of managerially imposed to external market constraints) cannot issue additional equity.Firms
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