Assignment for 2nd Periodical

CASE 13

Q1 Identify the type of investment decision taken by Manoj by deciding to set

up a separate manufacturing unit for producing jute products?
Ans The type of decision taken by Manoj is “Capital Budgeting”.
Capital Budgeting means Capital budgeting means deciding in advance how
much capital will be invested in long term project which will bring maximum
profit to the firm.

Q2 State any four factors that he is likely to consider while taking this decision?

No of Share = 100,000 Income Tax Rate = 30%

EBIT = $200,000 Price Per Share = $4.20
Long term debt = $1 million Coupon rate on Bound = 8%

Find its (A) P/E ratio, (B) Interest coverage ratio, and (C) Debt ratio

Ans Factor affecting capital Budgeting Decision

 Cash flow of the project: If anticipated cash flows are more than the cost
involved then such project are considered.

 The rate of return: The investment proposal which ensures highest rate of
return is finally selected.

 Risk involved: While investing in long term project we always check how
much. risk involved in this project

 Scale of operation: A large scale organisation requires higher investment

in plant and machinery as compared to small scale organisation.
Interest on Bond = $1 Million × 8%
= 10,00,000 × 0.08
= $80,000

EBIT = $200,000
(-) Interest = $80,000
EBT = $1,20,000
(-)Tax = ($36,000) (0.3 × 1,20,000)
EAT = $84,000
Earnings per share = EAT / No. of share
= 84,000 / 1,00,000
= $0.84

A)P/E Ratio = Market Price Per Share / Earning Per

Share
= $4.20 / $0.84
= 5Times

B) Interest Coverage = EBIT / Interest

Ration
= 200,000 / 80,000
= 2.5
Total Assets of firm = Total Debt + Total Equity
= 10,0,00000 + 4.2 × 100,00
= 14,20,000

C) Debt Rate = Total Debt / Total Assets

= 10,00,000 / 14,20,000
= 70.42%