Professional Documents
Culture Documents
To,
The Principal,
Pimpri,
Pune 411018
Dear Sir,
I am happy to inform you that SHASHWAT TIWARI student of your college has successfully
completed the 60 Hours of Internship Program in our organization.
The student has been provided with adequate exposure and necessary hands- on training
pertaining to their special subject. I am confident that the student will perform effectively in
similar type of organizations.
Thank you.
Sincerely
(Authorized Signatory)
Office : Shop No. 19, Swarnalaxmi Apartment, Mahesh Nagar, Sant Tukaram Nagar,
Pimpri, Pune – 411018
2. Name of the College: T.Y.BBA : D.Y Patil Arts, Science & Commerce College
Office : Shop No. 19, Swarnalaxmi Apartment, Mahesh Nagar, Sant Tukaram Nagar,
Pimpri, Pune – 411018
Certified that SHASHWAT TIWARI has satisfactorily completed the internship program assigned to
him.
Date
Office : Shop No. 19, Swarnalaxmi Apartment, Mahesh Nagar, Sant Tukaram Nagar,
Pimpri, Pune – 411018
Office : Shop No. 19, Swarnalaxmi Apartment, Mahesh Nagar, Sant Tukaram Nagar,
Pimpri, Pune – 411018
Part C – Suggestions to make the internship program more productive and effective.
1.
2.
3.
4.
5. Part D – Changes required in the curriculum to improve employability of students.
1.
2.
3.
4.
5.
Name, Designation and Signature of the Supervisor / Reviewing Officer Place of Review:
Office : Shop No. 19, Swarnalaxmi Apartment, Mahesh Nagar, Sant Tukaram Nagar,
Pimpri, Pune – 411018
SUBMITTED TO
SAVITRIBAI PHULE PUNE UNIVERSITY
SUBMITTED BY
SHASHWAT TIWARI
(AY 2021-22)
UNDER THE GUIDANCE OF
AT
DR. D.Y. PATIL ARTS COMMERCE AND SCIENCE COLLEGE,
PIMPRI, PUNE 411018
1
Dr. D.Y. Patil Unitech Society’s
DR. D.Y. PATIL ARTS, COMMERCE & SCIENCE COLLEGE
Pimpri, Pune 411018
Affiliated to Savitribai Phule Pune University (ID NO. PU/PN/ACS/111/1995)
Recognised by Govt of Maharashtra
CERTIFICATE
2
INDEX
1 Title Page 1
2 Internship Completion Certificate
3 Internship Log Sheet
4 Internship Feedback Form
5 Project Completion Certificate By
College
6 Index 3
7 1. Introduction 4
8 2. Industry Profile 18
9 3. Company Profile 26
10 4. Theory 29
11 5. Objectives & Scope 51
12 6. Research Methodology 52
13 7. Data Analysis & Interpretation 55
14 8. Observation & Findings
15 9. Conclusion
16 10. Suggestions
3
FUNDRAISING & CAPITAL BUDGETING
1. INTRODUCTION
4
Importance Of Fundraising
The importance of money in business cannot be exaggerated. With rare exceptions, money
is crucial to get a business up and running. Once profits start coming in, some of that
revenue can be reinvested in the business to attract more customers and rake in even more
profits. Proper planning and cash management ensure that business funds are not wasted on
initiatives with a poor return on investment.
A business empire is not built on blood and sweat alone. Even Steve Jobs had to sell his
Volkswagen car to fund the creation of Apple. The importance of money to set a business
off the ground cannot be exaggerated. It is an absolute necessity. It is this necessity that
makes resources around funding a business some of the most searched topics across the
internet.
Money or capital requirements, represents a significant barrier to entry for many people
interested in starting a new business. For example, even a chef with incredible passion and
talent must be able to afford all the startup costs associated with opening a restaurant,
including the building lease, kitchen equipment, dining furniture, staff paychecks and
business licenses. Obtaining a business loan or other form of startup funding, allocating the
money wisely, and making enough profit to pay back the lender is certainly easier said
than done. With everything else being equal, money is often the limiting factor preventing
a business from opening.
Many business ideas are never funded and not necessarily for lack of trying. If a business
idea seems too risky or the loan applicant has poor credit, lenders and investors won't
provide funding. Without funding, people who don't have personal savings to dip into
can't launch a business.
The initial round of funding is used to develop the product or business idea further. A new
product is designed, manufactured and tested, whereas a service-oriented business might
purchase the equipment and space necessary to carry out day-to-day operations.
The role of money in business marketing also becomes apparent at this stage. After the
product is created or the service process has been fleshed out, it's time to attract customers
and their money. Effective marketing is a full-time job and not cheap. Adequate startup
funding should be set aside for marketing to generate the crucial cash flow from customers,
which becomes the sustaining force of all businesses.
The global funding in the first half of 2021 has already broken records with more
than $288 billion investments taken place worldwide. On a global scale, there are now
around 900 unicorn companies, many of which are expected to go public soon. Investors
are looking for companies that can become the next Facebook, Spotify, Instagram, etc.
The way the funding industry is moving forward is a sign that it is all set to create
business empires across domains. This upward movement is leading to a situation where
businesses have started asking questions around investor funding.
Today, we are going to answer the one basic question – what is the importance of funding
for businesses.
5
For a business, fundings does not just help them initiate their journey but help with hiring
a team, buying equipment, marketing and promoting their brand. Even though the world is
filled with use cases of how lack of funding support can lead to brand failures, there are
companies that don’t acknowledge the importance of funds in a business. Let us solve
this.
It's important to remember that startup funding is a type of loan. Unless the money is expressly given as
After you pay off the startup funding in full, that same careful cash management keeps your business af
It's smart to hire a business accountant to organize and update all financial records and transactions. Col
6
Importance Of Fundraising For Startups
The benefits of funding for business sometimes go beyond the financial support. It
can help new entrepreneurs with the guidance and support they need to become
successful industry leaders. Let us look into some of the benefits of business funding.
7
There is often always one thing between a business that runs its operation on a local
ground vs one that is global – funds. The right investors can give brands the necessary
monetary and advice-related support that plays a role in taking them forward on a global
scale.
8. Growth funding
Whether businesses wish to increase their sales number, expand the scope of their product
or service, or grow on a local or global scale, growth funds can help them get there. A
financial arrangement that comes with funding.
Irrespective of what the definition of growth for a company is, funding can help them
get there.
8
• Market size & opportunity –
• Innovative ideas fail if the target market size is small
• Can also fail if the target market is saturated, monopolized or unprofitable.
• The opportunity and target market size can be measured using several metrics such as
addressable market size, obtainable market size, financial margins, direct competitors &
barriers to entry
• Revenue growth & scalability –
• Measured by traction, market adoption, customer growth & profitability.
Funding rounds
A number of startups go through multiple funding rounds. The fundraising stages can be
categorized into three groups: Series A, Series B, and Series C funding. Each of these
categories are aligned with the stage the company is at. In each funding round, money is
usually exchanged for some company equity, this means that the investors take a return in
company share on their investment.
Venture capitalists
When we talk about the sources of funds for business, it is impossible to not mention VCs.
A venture capitalist is a private investor who gives funds to promising startups. They are
often a part of a larger venture capital company who has a board which votes on which
company they will be backing.
When the company gets chosen by a venture capital firm, the VC reaches out to the
company with a fund offer. Traditionally, the venture capitalists take equity in the
company, which means that they want to get a payout.
Crowdfunding
9
For entrepreneurs, the combination of a business idea and little to zero funding takes
them to crowdfunding.
It is a type of funding in which small amounts of capitals are raised from a number of
individuals to back a business venture. The fund type makes use of the wide network of
people on crowdfunding websites and social media platforms that bring entrepreneurs and
investors together. This model, doesn’t just help increase the entrepreneur network but also
the investors circle by giving individuals a chance to become serial investors.
Incubators
A business incubator or accelerator program as it is commonly called, is a group which is
centric to helping set businesses off ground. The incubators are usually founded and
funded by other companies which want to help emerging businesses reach their complete
potential. They also provide space for the companies to work in, give funding assistance,
and even provide mentoring. The holistic nature of support which they offer makes it one
of the most popular sources of funds for business.
1
Process Of Fund-Raising
business along with its past as well as projected financial statements) as required for
8. Listing Of Issue
1
Sources of Funding
Companies always seek sources of funding to grow their business. Funding, also called
financing, represents an act of contributing resources to finance a program, project, or
need. Funding can be initiated for either short-term or long-term purposes.
Corporations often need to raise external funding or capital in order to expand their
businesses into new markets or locations. It also allows them to invest in research &
development (R&D) or to fend off the competition. And, while companies do aim to use
the profits from ongoing business operations to fund such projects, it is often more
favorable to seek external lenders or investors to do so.
The three major sources of corporate financing are retained earnings, debt capital, and
equity capital. Retained earnings refer to any net income remaining after a company
pays off any expenses and obligations. Debt capital is funding that a company raises by
borrowing money from lenders through loans or corporate bond offerings.
One of the main ways that companies can raise money internally is through retained
earnings. This is the simplest and easiest way to do so. Retained earnings is a generalized
term that refers to any net income that remains after any expenses and obligations are
paid off.
Both debt and equity financing can be risky. Debt financing obligates companies to repay
creditors. Failure to repay can result in default or bankruptcy. This can affect corporate
credit scores. While companies aren't obligated to repay any debts with it, there are no tax
benefits associated with equity financing. There's also a risk of dilution of ownership since
it involves adding more shareholders to the mix. Investors (new and old) may also expect a
share of corporate profits.
In an ideal world, a company would simply obtain all of the money it needed to grow
simply by selling goods and services for a profit. But, as the old saying goes, "you have to
spend money to make money," and just about every company has to raise funds at some
point to develop products and expand into new markets.
When evaluating companies, look at the balance of the major sources of funding. For
example, too much debt can get a company into trouble. On the other hand, a company
might be missing growth prospects if it doesn't use money it can borrow. Financial analysts
and investors often compute the weighted average cost of capital (WACC) to figure out
how much a company is paying on its combined sources of financing.
1
Despite all the differences among the thousands of companies in the world across various
industry sectors, there are only a few sources of funds available to all firms. Some of the
best places to look for funding are retained earnings, debt capital, and equity capital. In this
article, we examine each of these sources of capital and what they mean for corporations.
- The main sources of funding are retained earnings, debt capital, and equity capital.
- Companies use retained earnings from business operations to expand or distribute
dividends to their shareholders.
- Businesses raise funds by borrowing debt privately from a bank or by going public
(issuing debt securities).
- Companies obtain equity funding by exchanging ownership rights for cash coming
from equity investors.
1
Retained Earnings
Businesses aim to maximize profits by selling a product or rendering service for a price
higher than what it costs them to produce the goods. It is the most primitive source of
funding for any company.
Companies generally exist to earn a profit by selling a product or service for more than
it costs to produce. This is the most basic source of funds for any company and,
hopefully, the primary method that brings in money to the firm. The net income left over
after expenses and obligations is known as retained earnings (RE).
After generating profits, a company decides what to do with the earned capital and how to
allocate it efficiently. The retained earnings can be distributed to shareholders as dividends,
or the company can reduce the number of shares outstanding by initiating a stock
repurchase campaign.
Retained earnings are important because they are kept by the company rather than being
paid out to shareholders as dividends. Retained earnings increase when companies earn
more, which allows them to tap into a higher pool of capital. When companies pay more
to shareholders, retained earnings drop.
These funds can be used to invest in projects and grow the business. Retained earnings
provide several advantages for businesses. Here's why:
Using retained earnings means companies don't owe anyone anything.
They are an inexpensive form of financing. The cost of capital of using retained earnings is
what's called the opportunity cost. This is what a company make shareholders give up by
not getting dividends. And corporations save on using retained earnings compared to
issuing bonds because they aren't obligated to pay interest to bondholders.
Corporate management can decide to use all or part of the company's earnings to pass on to
shareholders. The leadership team can then decide how to use whatever funds to
be reinvested back into the company.
They do not dilute ownership.
But there are cons to using retained earnings to fund projects and fuel corporate growth.
For instance:
Shareholders can lose value even with retained earnings that are reinvested back into the
company. That's because there's a chance that they won't result in higher profits.
There is also the argument that using reinstated earnings is not cost-effective because they
don't actually belong to the company. Instead, they belong to shareholders.
Pros
- Don't owe anyone anything
- Inexpensive form of financing
- Flexibility to use retained earnings as management desires
- Do not dilute ownership
1
Debt Capital
Companies obtain debt financing privately through bank loans. They can also source new
funds by issuing debt to the public.
In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds or
promissory notes. Debt issues also include debentures, leases, and mortgages.
Like individuals, companies can borrow money—and they do. Using borrowed capital to
fund projects and fuel growth isn't uncommon. There are several instances when debt
capital comes in handy. for short-term needs. And businesses that are deemed high-growth
need a lot of capital and they need it fast. Borrowing money can be done privately through
traditional loans through a bank or other lender, or publicly through a debt issue.
Companies that initiate debt issues are borrowers because they exchange securities for cash
needed to perform certain activities. The companies will be then repaying the debt
(principal and interest) according to the specified debt repayment schedule and contracts
underlying the issued debt securities.
Debt capital comes in the form of traditional loans and debt issues. Debt issues are known
as corporate bonds. They allow a wide number of investors to become lenders or creditors
to the company. Just like consumers, companies can reach out to banks, other financial
institutions, and other lenders to access the capital they need. This gives them a leg up
because:
Borrowing money allows individuals to take a tax deduction on any interest payments
made to banks and other lenders.
Interest costs tend to be less expensive than other sources of capital.
It can help boost corporate credits scores, which is especially beneficial for new
companies.
Because the funds are borrowed, there is no need to share profits with investors.
But there are downfalls to using debt capital. For instance:
The main consideration for borrowing money is that the principal and interest must be paid
to the lenders or bondholders. This may be problematic when profits are scarce.
A failure to pay interest or repay the principal can result in default or bankruptcy.
The drawback of borrowing money through debt is that borrowers need to make interest
payments, as well as principal repayments, on time. Failure to do so may lead the borrower
to default or bankruptcy.
1
Equity Capital
Companies can raise funds from the public in exchange for a proportionate ownership
stake in the company in the form of shares issued to investors who become shareholders
after purchasing the shares.
Alternatively, private equity financing can be an option, provided there are entities or
individuals in the company’s or directors’ network ready to invest in a project or
wherever the money is needed for.
A company can raise capital by selling off ownership stakes in the form of shares to
investors who become stockholders. This is known as equity funding. Private corporations
can raise capital by offering equity stakes to family and friends or by going public through
an initial public offering (IPO). Public companies can make secondary offerings if they
need to raise more capital.
Compared to debt capital funding, equity funding does not require making interest
payments to a borrower.
The benefit of this method is that:
There's nothing to repay. That's because this type of financing relies on investors—
not creditors.
It allows companies with poor credit histories to raise money.
Disadvantages of equity capital include:
Dilution. Equity shareholders also have voting rights, which means that a company
forfeits or dilutes some of its control as it sells off more shares. This includes small
businesses and startups that bring in venture capitalists to help fund their companies.
Costs. Equity capital tends to be among the most expensive forms of capital as investors
may expect a share in profit.
There are no tax benefits like the ones offered by debt financing.
Internal headaches. Bringing in outside financing can lead to increased tension as investors
may not agree with management's views of where the company is heading.
However, one disadvantage of equity capital funding is sharing profits among all
shareholders in the long term. More importantly, shareholders dilute a company’s
ownership control as long as it sells more shares.
1
Other Funding Sources
Funding sources also include private equity, venture capital, donations, grants, and
subsidies that do not have a direct requirement for return on investment (ROI), except for
private equity and venture capital. They are also called “crowdfunding” or “soft funding.”
Crowdfunding represents a process of raising funds to fulfill a certain project or undertake
a venture by obtaining small amounts of money from a large number of individuals. The
crowdfunding process usually takes place online.
1
2. INDUSTRY PROFILE
Industry Size
In the year 1930, it was decided that the Government of India should maintain
a register called the Register of Accountants. Any person whose name was
entered in such register was called a Registered Accountant.Later on a board
called the Indian Accountancy Board was established to advise the Governor
General of India on accountancy and the qualifications for auditors. However,
it was felt that the accountancy profession was largely unregulated, and this
caused much confusion as regards the qualifications of auditors. Hence in the
year 1948, just after independence in 1947, an expert committee was created
to look into the matter. This expert committee recommended that a
1
separate
1
autonomous association of accountants should be formed to regulate the
profession. The Government of India accepted the recommendation and
passed the Chartered Accountants Act in 1949 even before India became a
republic. Under section 3 of the said Act, ICAI is established as a body
corporate with perpetual succession and a common seal.
2
Growth Trends
2
Major Players
1. Deloitte India:
Deloitte India is the first and most significant subsidiary of Deloitte Touche
Tohmatsu ltd., a UK-based firm known as DTTL throughout the entire globe.
- Audit
- Tax
- Financial Advice
- Legal
- Consulting, and risk advisory services, among other things.
2. PwC
Price Waterhouse Coopers India has a global network of over 157 countries
and over 280,000 passionate professionals.
PWC India's objective is to provide the highest quality tax and advice services
possible.
Aspiring CAs in India may have the option to further their careers with PwC.
2
3. Ernst & Young India - EY, India
Ernst & Young India is one of India's leading four accounting firms.
- Assurance Services
- Advisory Services
Ernst & Young India is a member firm of Ernst & Young Global Ltd. with its
own legal system of India.
Ernst & Young Global Ltd. is a UK-based firm that offers professional
services from its headquarters in London.
Thus, EY, India is regarded as one of the nation's top four Top Shot CA audit
firms.
4. KPMG India
KPMG India Private Ltd. comes in second on our ranking of the best
accounting companies in India. The firm was founded in India in the year
1993. KPMG India offers its renowned clients a wide range of financial
services, business advice, tax-related regulation, and risk advisory services.
You may feel confident that KPMG India offers many career-building
possibilities for prospective CAs and boosts their motivation to study first and
earn afterward
KPMG India is one of India's Big 4 Top Shot auditing and consulting
organizations.
2
Thus, KPMG has expanded its employment opportunities with more than
175,000 workers and particular services such as audit, advisory, and taxation.
5. BDO India
BDO India is one of the finest CA business firms in India, with a professional
approach to developing worthy and ambitious individuals interested in a
career in finance, accounting, or tax consulting.
Tax-related regulatory
Financial services
It has served national and international clients with vast experience and
goodwill for years.
Binder Seidman International Group, based in Canada, Germany, the
Netherlands, the United Kingdom, and the United States, founded BDO India
in 1988.
BDO was created in 1973 from the initials of three founding European
member firms:
Binder (UK)
And was branded as a brand in accountancy and tax consulting with the BDO
acronym.
2
Market Shares Of Major Players
“We are, therefore, screening the partnership agreements of all these firms to
analyse the legal basis on which the foreign firms audit Indian companies,”
the source added.
2
Much of this will change, however, once the Limited Liability Partnership
(LLP) Act, 2008, which enables foreign chartered accounting firms to set up
audit practices in India, is notified. The Bill was passed by Parliament on
December 12, 2008, but is yet to be notified.
Second, the rule of capping the number of audits per partner per firm may
also be scrapped or the limit raised, to allow more freedom and competition.
The rules currently allow 30 audits per partner per firm, but thinking in the
government is that this rule tends to play down merit, since it means audit
firms get business irrespective of their track record.
Also under review is the practice of rotating chartered accountants by
companies in the interests of introducing more accountability and
transparency in the profession. Currently an option, regulators think it makes
companies stick to the same auditor for years, which may promote more
accounting frauds.
2
3. COMPANY PROFILE
The firm is backed by an experienced team of professional who are specialized in the
matters relating to Audits, Company Law, Industrial & Financial Consultancy, Income Tax
and other Direct & Indirect taxes, Project Finance besides the firm retains the service of
expert from time to time cater to the specific needs of the clients The firm was established
by CA. Sanket Shingavi as a Proprietary Firm in the year 2018. In early 2020 it has got
converted into a Partnership Firm under the name & style of S S A R & Co by admitting
CA Rushikesh Aneray as a partner. The firm has also opened their branch offices in Pune
to service the expanding surrounding areas. The firm also has networking associates
throughout India.
The firm provides value based services in the domain of Direct Taxes, Indirect Taxes,
Transaction Advisory Services, Outsourcing, and Business Consulting & Risk Advisory
Services. The firm believes in providing cutting edge services to its clients in a holistic
manner. The unique blend of analytical, insightful and a motivated team provide an
unassailable advantage to the firm in executing assignments in an effective and efficient
manner. The firm has created a niche in creating specific service lines in each of the main
practice domains it provides services in. Proactively measuring the industry and business
needs has helped the firm to offer tailor made solutions for clients which at times are an
overlay of all the practice domains.
- OBJECTIVE
The philosophy of this firm is about partnering with their clients and not being a distant
service provider. Since businesses are inherently different, they tailor their services to meet
client’s specific needs and banish the ‘one-size-fits-all’ standardisation. The company
services are aimed at protecting our client’s interests. By adopting transparent processes
and adhering to highest ethical standards, they ensure client confidentiality and our own
2
credibility. Whilst collaborating with the clients, they remain absolutely independent to
2
deliver unbiased opinions. The firm is backed by an experienced team of professional who
are specialized in the matters relating to Audits, Company Law, Industrial & Financial
Consultancy, Income Tax and other Direct & Indirect taxes, Project Finance besides the
firm retains the service of expert from time to time cater to the specific needs of the clients.
The focus on delivering exceptional client service is backed by a partner driven approach
to offer tailor-made solutions ensuring quality excellence & time efficiencies. Commitment
to stakeholder conformance underpin our efforts to deliver value through each of our
advisory solutions because we believe that 'One Stop Solution for all your Business needs'.
- ESTABLISHMENT
The firm has its head offices and one branch at Pune fully equipped with all the latest
facilities and centrally located. The firm is also associate network in major cities
throughout India to service the expanding surrounding areas
Branch Office : Shop No. 19, Suvarnalaxmi Apartment, Mahesh Nagar, Sant
Head Office : Office No. C-4, Shree Vihar Society, Siddhivinayak Nagari Road,
Email : carushikeshaneray@gmail.com
2
- MANAGEMENT
Partners - 2
Qualification And Profesionals(CA/CS) - 1 Semi-Qualified Profesionals - 2
Senior Audit Asssistants - 2 Junior Audit Asssistants - 4
Total – 11
3
4. THEORY
Investment Decisions:
In the terminology of financial management, the investment decision means capital
budgeting. Investment decision and capital budgeting are not considered different acts in
business world. In investment decision, the word ‘Capital’ is exclusively understood to
refer to real assets which may assume any shape viz. building, plant and machinery, raw
material and so on and so forth, whereas investment refers to any such real assets.
In other words, investment decisions are concerned with the question whether adding to
capital assets today will increase the revenues of tomorrow to cover costs. Thus investment
decisions are commitment of money resources at different time in expectation of economic
returns in future dates.
Choice is required to be made amongst available alternative revenues for investments.
As such investment decisions are concerned with the choice of acquiring real assets over
the time period in a productive process.
3
In this case, the firm decides to expand the productive capacity for existing products
and thus grows further in a uni-direction. This type of investment is also called capital
widening.
Need for Investment Decisions:
The need for investment decisions arrives for attaining the long term objective of the
firm viz. survival or growth, preserving share of a particular market and retain leadership
in a particular aspect of economic activity.
The firm may like to make investment decision to avail of the economic opportunities
which may arise due to the following reasons:
(i) Expansion of the productive process to meet the existing excessive demand in local
market to exploit the international markets and to avail the benefits of economies of
scale.
(ii) Replacement of an existing asset, plant, machinery or building may become necessary
for reaping advantages of technological innovations, minimising cost of products and
increasing the efficiency of labour.
(iii) Buy or hire on rent or lease a particular asset is another important consideration
which establishes the need for making investment decisions.
The Financing Decision is a crucial decision that is to be made by the financial manager,
the decision is about the financing-mix of an organization. Financing Decision is focused
on the borrowing and allocation of funds required for the investment decisions of the firm.
We will learn in detail about these various financing decisions in the upcoming section.
The financing decision comes from two sources from where the funds can be raised – first
is from the company’s own money, such as the share capital, retained earnings. Second is
from borrowing funds from the outside the corporate in the form debenture, loan, bond,
etc. The objective of the financial decision is to balance an optimum capital structure.
3
- Investment Decision
Also known as the Capital Budgeting Decisions. A company’s assets and resources are
very rare and thus must be put to use with much analysis. A firm should pick those
investments where he can gain the highest conceivable returns. Investment decision
involves careful selection of the assets where funds will be invested by the corporates.
- Financing Decision
Financial decision is the utmost important decision which is to be made by business
individuals. These are wise decisions indeed that are to be chalked out with proper
analysis. He decides when, where and how should the business acquire the fund. An
organization’s increase in share is not only a sign of development for the firm but also to
boost the investor’s wealth.
- Dividend Decision
Dividend decisions relate to the distribution of profit that are earned by the organization.
The main criteria in this decision are whether to distribute to the shareholders or to retain
the earnings. Dividend decisions are affected by the earnings of the business, dependency
on earnings.
3
Nature of these decisions is irreversible, once taken it cannot be reformed. For instance, if
soon after setting up a sugar mill, the owner thought of changing it, then the old machinery
used for the purpose and other fixed assets will have to be sold at a loss. In doing this, the
heavy loss will have to be incurred by the owner.
A business constitutes two major things: money and the decision through which the
business runs efficiently. Without money, the survival of the company could be impossible
and without decisions, survival of money could be impossible. The lifetime of the
company completely depends on the countless decisions an administration makes.
Probably, the most important things are regarding money. The money decisions related are
called ‘Financing Decisions.’
Investment Decision is also referred to as Capital Budgeting Decisions. The assets and
resources of the company are rare and must be put into utmost utilization. In order to gain
the highest conceivable returns, a firm should pick where to invest. Funds will be invested
based on the careful selection of assets by the firms. In procuring fixed assets and current
assets, the firm funds are invested. If the choice is taken with respect to a fixed asset it is
called a capital budgeting decision.
- Investment Criteria: Various Capital Budgeting procedures are used for a business
to assess various investment propositions. Most importantly, they are based on
calculations with respect to investment, interest rates, cash flows, and rate of
returns associated with propositions. These are applied to the investment
proposals to make a decision on the best proposal.
3
- Cost: Financing decisions are based on the allocation of funds and cost-cutting. The
cost of fundraising from different sources differs a lot and the most cost-efficient
source should be chosen.
- Risk: The dangers of starting a venture with funds differ based on various sources.
Borrowed funds have a larger risk compared to equity funds.
- Cash flow position: Cash flow is the daily earnings of the company. A good
cash flow position gives confidence to the investors to invest funds in the
company.
- Control: In this case where existing investors hold control of the business and raise
finance through borrowing money, however, equity can be utilized for raising
funds when they are prepared for diluting control of the business.
- Condition of the market: The condition of the market plays a major role in
financing decisions. Issuance of equity is in majority during the boom period,
but debt of a firm is used during a depression.
According to Prof. Ezra Solomon, for making optimum investment decisions, the
following three types of information is required:
(i) Estimate of capital outlays and the future earnings of the proposed project focusing
on the task of value engineering and market forecasting,
(ii) Availability of capital and consideration of cost-focusing attention as financial analysis,
and
(iii) A correct set of standards by which to select projects for execution to maximise return-
focusing attention on logic and arithmetic.
2. Sources of Capital:
Sources of capital can be divided into the following four categories:
Cost of Capital:
The cost of capital plays a very important role in appraising investment decisions.
Whenever a firm mobilises capital from different sources, it has to consider the cost of
capital very carefully for making the final choice.
Interest can be explained as an amount which is paid by a borrower for using funds
belonging to some- one else. Therefore, it is a transaction between surplus and deficit
units.
The investor should know that he has to cope with the different kinds of interest rates
called by different names and to be a successful investor, he should be able to
recognise the kinds of interest rates and by whom these rates are fixed. The investor
should also carefully analyse the different kinds of interest rates available in the
economy before he makes his investments.
Different kinds of interest rates existing in the markets are listed below:
(i) Ceiling Rate of Interest:
It is the maximum rate of interest usually fixed by the Government of India and the RBI. It
depends on the face value of a financial instrument.
3
(ii) Coupon Rate of Interest:
It is the rate of interest which is paid on the face value of a bond or debenture. A person
who purchases a long-term bond or debenture expects an interest in the form of coupon.
3
Capital Budgeting
Capital budgeting is the process a business undertakes to evaluate potential major projects
or investments. Construction of a new plant or a big investment in an outside venture are
examples of projects that would require capital budgeting before they are approved or
rejected.
As part of capital budgeting, a company might assess a prospective project's lifetime cash
inflows and outflows to determine whether the potential returns that would be generated
meet a sufficient target benchmark. The capital budgeting process is also known as
investment appraisal.
Capital budgeting is the process of making investment decisions in long term assets. It is
the process of deciding whether or not to invest in a particular project as all the investment
possibilities may not be rewarding.
Thus, the manager has to choose a project that gives a rate of return more than the cost
financing such a project. That is why he has to value a project in terms of cost and
benefit.
Following are the categories of projects that can be examined using capital budgeting
process:
1. It involves the purchase of long term assets and such decisions may determine the
future success of the firm.
3
Features of Capital Budgeting
Capital Budgeting is characterized by the following features:
- There is a long duration between the initial investments and the expected returns.
- The organizations usually estimate large profits.
- The process involves high risks.
- It is a fixed investment over the long run.
- Investments made in a project determine the future financial condition of an
organization.
- All projects require significant amounts of funding.
- The amount of investment made in the project determines the profitability of
a company.
Investment and financial commitments are part of capital budgeting. In taking on a project, the company
To measure the longer-term monetary and fiscal profit margins of any option contract,
companies can use the capital-budgeting process. Capital budgeting projects are accepted
or rejected according to different valuation methods used by different businesses. Under
certain conditions, the internal rate of return (IRR) and payback period (PB) methods are
sometimes used instead of net present value (NPV) which is the most preferred method.
If all three approaches point in the same direction, managers can be most confident in
their analysis.
Ideally, businesses would pursue any and all projects and opportunities that
enhance shareholder value and profit. However, because the amount of capital or money
any business has available for new projects is limited, management uses capital budgeting
techniques to determine which projects will yield the best return over an applicable
period.
4
Although there are numerous capital budgeting methods, below are a few that companies
can use to determine which projects to pursue.
It is of prime importance for a company when dealing with capital budgeting decisions that
it determines whether or not the project will be profitable. Although we shall learn all the
capital budgeting methods, the most common methods of selecting projects are:
It might seem like an ideal capital budgeting approach would be one that would result
in positive answers for all three metrics, but often these approaches will produce
contradictory results. Some approaches will be preferred over others based on the
requirement of the business and the selection criteria of the management. Despite this,
these widely used valuation methods have both benefits and drawbacks.
Investing in capital assets is determined by how they will affect cash flow in the future,
which is what capital budgeting is supposed to do. The capital investment consumes less
cash in the future while increasing the amount of cash that enters the business later is
preferable.
Keeping track of the timing is equally important. It is always better to generate cash sooner
than later if you consider the time value of money. Other factors to consider include scale.
To have a visible impact on a company's final performance, it may be necessary for a large
company to focus its resources on assets that can generate large amounts of cash.
In smaller businesses, a project that has the potential to deliver rapid and sizable cash flow
may have to be rejected because the investment required would exceed the company's
capabilities.
The amount of work and time invested in capital budgeting will vary based on the risk
associated with a bad decision along with its potential benefits. Therefore, a modest
investment could be a wiser option if the company fears the risk of bankruptcy in case the
decisions go wrong.
Sunk costs are not considered in capital budgeting. The process focuses on future cash
flows rather than past expenses.
4
Techniques/Methods of Capital Budgeting
In addition to the many capital budgeting methods available, the following list outlines a
few by which companies can decide which projects to explore:
It refers to the time taken by a proposed project to generate enough income to cover
the initial investment. The project with the quickest payback is chosen by the
company.
Formula:
This brings the enterprise to conclude that Product B has a shorter payback period
and therefore, it will invest in Product B.
Despite being an easy and time-efficient method, the Payback Period cannot be called
optimum as it does not consider the time value of money. The cash flows at the earlier
stages are better than the ones coming in at later stages. The company may encounter two
projections with the same payback period, where one depicts higher cash flows in the
earlier stages/years. In such as case, the Payback Period may not be appropriate.
A similar consideration is that of a longer period, potentially bringing in greater cash flows
during a payback period. In such a case, if the company selects the projects based solely on
the payback period and without considering the cash flows, then this could prove
detrimental for the financial prospects of the company.
Evaluating capital investment projects is what the NPV method helps the companies with.
There may be inconsistencies in the cash flows created over time. The cost of capital is
used to discount it. An evaluation is done based on the investment made. Whether a project
is accepted or rejected depends on the value of inflows over current outflows.
This method considers the time value of money and attributes it to the company's
objective, which is to maximize profits for its owners. The capital cost factors in the cash
flow during the entire lifespan of the product and the risks associated with such a cash
flow. Then, the capital cost is calculated with the help of an estimate.
Formula:
4
(1+i)t
Calculation
0 -$10,000 -$10,000 -
4
Total $18,629
IRR refers to the method where the NPV is zero. In such as condition, the cash inflow rate
equals the cash outflow rate. Although it considers the time value of money, it is one of the
complicated methods.
It follows the rule that if the IRR is more than the average cost of the capital, then the
company accepts the project, or else it rejects the project. If the company faces a situation
with multiple projects, then the project offering the highest IRR is selected by them.
Internal Rate of Return Rule = Accept investments if IRR greater than Threshold Rate of Return, else re
Example:
We shall assume the possibilities exhibited in the table here for a company that has 2
projects: Project A and Project B.
Project B
Year Project A
0 -$10,000 -$10,000
4
1 $2,500 $3,000
2 $2,500 $3,000
3 $2,500 $3,000
4 $2,500 $3,000
5 $2,500 $3,000
Here, The IRR of Project A is 7.9% which is above the Threshold Rate of Return (We
assume it is 7% in this case.) So, the company will accept the project. However, if the
Threshold Rate of Return would be 10%, then it would be rejected as the IRR would be
lower. In that case, the company will choose Project B which shows a higher IRR as
compared to the Threshold Rate of Return.
#4 Profitability Index
This method provides the ratio of the present value of future cash inflows to the initial
investment. A Profitability Index that presents a value lower than 1.0 is indicative of lower
cash inflows than the initial cost of investment. Aligned with this, a profitability index
great than 1.0 presents better cash inflows and therefore, the project will be accepted.
Formula:
Initial Investment
Example:
Assuming the values given in the table, we shall calculate the profitability index for a
discount rate of 10%.
0 -$10,000 -$10,000
4
1 $3,000 $2,727
2 $5,000 $4,132
3 $2,000 $1,538
4 $6,000 $4,285
5 $5,000 $3,125
Total $15,807
Investment proposals are the first step in capital budgeting. Taking up investments in a
business can be motivated by a number of reasons. There could be the addition or
expansion of a product line. An increase in production or a decrease in production
costs could also be suggested.
It mainly consists of selecting all criteria necessary for judging the need for a proposal.
In order to maximize market value, it has to match the company's mission. It is crucial
to consider the time value of money here.
In addition to estimating the benefits and costs, you should weigh the pros and
cons associated with the process. There could be a lot of risks involved with the
total cash inflows and outflows. This needs to be scrutinized thoroughly before
moving ahead.
4
- Selecting a Project
After the project has been finalized, the other components need to be attended to.
These include the acquisition of funds which can be explored by the finance
department of the company. The companies need to explore all the options before
concluding and approving the project. Besides, the factors like viability, profitability,
and market conditions also play a vital role in the selection of the project.
- Implementation
Once the project is implemented, now come the other critical elements such as
completing it in the stipulated time frame or reduction of costs. Hereafter, the
management takes charge of monitoring the impact of implementing the project.
- Performance Review
This involves the process of analyzing and assessing the actual results over the
estimated outcomes. This step helps the management identify the flaws and eliminate
them for future proposals.
4
- Factors Affecting Capital Budgeting
So far in the article, we have observed how measurability and accountability are two
primary aspects that achieve the center stage through capital budgeting. However,
while on the path to accomplish a competent capital budgeting process, you may
come across various factors that may affect it.
Let us move on to observing the factors that affect the capital budgeting process.
al Return Accounting Methods Structure of Capital Availability of Funds Management decisions Government Policies Wo
Need of the project
Lending terms of financial institutions Earnings
Taxation Policies
The economic value of the project
Although capital budgeting provides a lot of insight into the future prospects of a business,
it cannot be termed a flawless method after all. In this section, we learn about some of the
limitations of capital budgeting.
4
LIMITATIONS OF CAPITAL BUDGETING
Cash Flows
Time Horizon
Time Value
Discount Rates
- Cash Flow
It is a simple technique that determines if an enhanced value of a project justifies the
required investment. The primary reason to implement capital budgeting is to achieve
forecasting revenue a project may possibly generate. The problem could be the estimate
itself. All the upfront costs or the future revenue are all only estimates at this point. An
overestimation or an underestimation could ultimately be detrimental to the performance of
the business.
- Time Horizon
Usually, capital budgeting as a process works across for long spans of years. While the
shorter duration forecasts may be estimated, the longer ones are bound to be miscalculated.
Therefore, an expanded time horizon could be a potential problem while computing
figures with capital budgeting.
Besides, there could be additional factors such as competition or legal or technological
innovations that could be problematic.
- Time Value
The payback period method of capital budgeting holds a lot of relevance, especially for
small businesses. It is a simple method that only requires the business to repay in the
predecided timeframe. However, the problem it poses is that it does not count in the time
value of money. This is to say that equal amounts (of money) have different values at
different points in time.
- Discount Rates
The accounting for the time value of money is done either by borrowing money, paying
interest, or using one’s own money. The knowledge of discount rates is essential. The
proper estimation and calculation of which could be a cumbersome task.
Even if this is achieved, there are other fluctuations like the varying interest rates that
could hamper future cash flows. Therefore, this is a factor that adds up to the list of
limitations of capital budgeting.
5
Discounted Cash Flow Analysis
Discounted cash flow (DFC) analysis looks at the initial cash outflow needed to fund a
project, the mix of cash inflows in the form of revenue, and other future outflows in the
form of maintenance and other costs.
Present Value
These cash flows, except for the initial outflow, are discounted back to the present date.
The resulting number from the DCF analysis is the net present value (NPV). The cash
flows are discounted since present value states that an amount of money today is worth
more than the same amount in the future. With any project decision, there is an opportunity
cost, meaning the return that is foregone as a result of pursuing the project. In other words,
the cash inflows or revenue from the project needs to be enough to account for the costs,
both initial and ongoing, but also needs to exceed any opportunity costs.
With present value, the future cash flows are discounted by the risk-free rate such as the
rate on a U.S. Treasury bond, which is guaranteed by the U.S. government. The future cash
flows are discounted by the risk-free rate (or discount rate) because the project needs to at
least earn that amount; otherwise, it wouldn't be worth pursuing.
Cost of Capital
Also, a company might borrow money to finance a project and as a result, must at least
earn enough revenue to cover the cost of financing it or the cost of capital. Publicly-traded
companies might use a combination of debt–such as bonds or a bank credit facility–
and equity–or stock shares. The cost of capital is usually a weighted average of both equity
and debt. The goal is to calculate the hurdle rate or the minimum amount that the project
needs to earn from its cash inflows to cover the costs. A rate of return above the hurdle
rate creates value for the company while a project that has a return that's less than the
hurdle rate would not be chosen.
Project managers can use the DCF model to help choose which project is more profitable
or worth pursuing. Projects with the highest NPV should rank over others unless one or
more are mutually exclusive. However, project managers must also consider any risks of
pursuing the project.
5
Payback Analysis
Payback analysis is the simplest form of capital budgeting analysis, but it's also the least
accurate. It's still widely used because it's quick and can give managers a "back of the
envelope" understanding of the real value of a proposed project.
Payback analysis calculates how long it will take to recoup the costs of an investment. The
payback period is identified by dividing the initial investment in the project by the average
yearly cash inflow that the project will generate. For example, if it costs $400,000 for the
initial cash outlay, and the project generates $100,000 per year in revenue, it'll take four
years to recoup the investment.
Payback analysis is usually used when companies have only a limited amount of funds
(or liquidity) to invest in a project and therefore, need to know how quickly they can get
back their investment. The project with the shortest payback period would likely be
chosen. However, there are some limitations to the payback method since it doesn't
account for the opportunity cost or the rate of return that could be earned had they not
chosen to pursue the project.
Also, payback analysis doesn't typically include any cash flows near the end of the
project's life. For example, if a project being considered involved buying equipment, the
cash flows or revenue generated from the factory's equipment would be considered but not
the equipment's salvage value at the end of the project. The salvage value is the value of
the equipment at the end of its useful life. As a result, payback analysis is not considered a
true measure of how profitable a project is but instead, provides a rough estimate of how
quickly an initial investment can be recouped.
Throughput Analysis
Throughput analysis is the most complicated form of capital budgeting analysis, but also
the most accurate in helping managers decide which projects to pursue. Under this method,
the entire company is considered as a single profit-generating system. Throughput is
measured as an amount of material passing through that system.
The analysis assumes that nearly all costs are operating expenses, that a company needs to
maximize the throughput of the entire system to pay for expenses, and that the way to
maximize profits is to maximize the throughput passing through a bottleneck operation. A
bottleneck is the resource in the system that requires the longest time in operations. This
means that managers should always place a higher priority on capital budgeting projects
that will increase throughput or flow passing through the bottleneck.
5
5. OBJECTIVES & SCOPE OF THE STUDY
AIM
The Aim of this study is to put the theoretical aspect of the study into practical
application based project report on a company to understand various concepts of
corporate finance and ways of fundraising like debt, equity etc, To Understand how
long-term / short term investment decisions are made & also to learn about capital
budgeting and allocation it highlights the review of capital budgeting and capital
expenditure management of the company. Capital Expenditure decisions require
careful planning and control. Such long term planning and control of capital
expenditure is called Capital Budgeting. The study also helps to understand how the
analysis of the alternative proposals and deciding whether or not to commit funds to
a particular investment proposal whose benefits are to be realized over a period of
time longer than one year. The capital budgeting is based on some tools namely
Payback period, Average Rate of Return, Net Present Value, Profitability Index,
and Internal Rate of Return.
SCOPE
The Scope of this report is limited to study of Capital structure & Financial
Statements of SSAR & Co.
OBJECTIVE
5
6. RESEARCH METHODOLOGY
INTRODUCTION:
“The procedures by which researcher go about their work of describing, explaining and
predicting phenomenon are called methodology”.
TYPE OF RESEARCH:
This Project “ Study On Fundraising & Capital Budgeting Of SSAR & Co.” is considered
as an practical application of theoretical finance concepts & hence an analytical research.
Analytical Research is defined as the research in which, researcher has to use facts or
information already available, and analyze these to make a critical evaluation of the facts,
figures, data or material.
The information for the study is obtained from two sources namely.
1. Primary Sources
2. Secondary Sources
a. Through interactions with the various department managers of “SSAR & Co.”
5
Sampling Design :
2. Secondary Sources: This data is from the number of books and records of the
company, the annual reports published by the company and other magazines. The
secondary data is obtained from the following.
SAMPLING DESIGN
5
LIMITATIONS
a. Since the procedure and policies of the company will not allow disclosing confidential
financial information, the project has to be completed with the available data given to us.
b. The period of study that is 2 weeks is not enough to conduct detailed study of the
project.
c. The study is carried is carried basing on the information and documents provided
by the organization and based on the interaction with the various employees of the
respective departments.
5
7. DATA ANALYSIS & INTERPRETATION
A Client Firm Of S.S.A.R & Co. Whose Cost Of Capital 10% is considering two mutually
exclusive project X & Project Y, The Details We Got By Analyzing Their Financial
Statements Are :
2 20,000 40,000
3 30,000 20,000
4 45,000 10,000
5 60,000 10,000
We Will Analyze The Data And Compute The NPV (Net Present Value) At 10%,
Profitability Index, Payback & Internal Rate Of Return For The Two Projects @
15%
1 0.909 0.870
2 0.826 0.756
3 0.751 0.658
4 0.683 0.572
5 0.621 0.497
5
Payback Period
PROJECT X
1 10,000 10,000
2 20,000 30,000
3 30,000 60,000
4 45,000 1,05,000
5 60,000 1,65,000
Payback Period :
= 3 + 40,000 / 45000
= 3.88 Years
PROJECT Y
1 50,000 50,000
2 40,000 90,000
3 20,000 1,10,000
4 10,000 1,20,000
5 10,000 1,30,000
Payback Period : = 2 + 10,000 / 20,000 = 2.5 Years
5
For Project X
For For
Project X Project X
@ 10% @ 15%
1,16,135 99,120
5
= 10 + 1,16,135 – 1,00,000 / 1,16,135 – 99,120 x (15-10)
= 10 + 16,135/17,015 x 5
= 14.74%
For Project Y
For For
Project X Project X
@ 10% @ 15%
5
5 0.621 0.497 10,000 6,210 4,970
1,06,550 97,590
= 10 + 6550/8,960 x 5
= 13.65%
4. PI ( Profitability Index)
Project X Project
PI = Present Value Of Cash PI = Present Value Of Cash
Inflows / Initial Investments Inflows / Initial Investments
5
8. OBSERVATIONS AND FINDINGS.
Through The Analysis Done Using NPV Method, We Can Find The NPV
Which is
Present Value Of A Project’s Net Cashflow Minus Initial Cash Outflows, If
NPV > 0 Accept The Project Or Else We Reject The Project
It Can Be Observed That NPV Of Project X @ 10% is 16,135 While
Project Y @ 10% is = 6,550
6
9. CONCLUSIONS
Financial Data. The Data Was Analyzed Using The Financial Reports Given
The IRR is a discount rate that makes the net present value (NPV) of all cash
flows equal to zero in a discounted cash flow analysis. IRR calculations rely
6
10. SUGGESTIONS
The greater the amount of an investment, the greater the risk of error.
Key to preparing a successful capital budgeting analysis is finding
someone with the expertise and experience to calculate accurate and
reasonable cash flows. If a business does not have a person like this
on hand, it does become more of a passion play and less an exercise in
critical business judgement
6
o Focus on where you can cut costs
o Have a plan in the case of a funding shortage.