Chpater:1 Capital Structure

Defination:The interest rate has to pay for collecting fund is called cost of capital.
Elements of Capital Structure:
Equity Share: Equity shares are the shares joint stock companies issue to the public as
the main source of long-term financing.
Debenture:A debenture is a type of bond or other debt instrument that is unsecured by
collateral.
Preference Share:Preferred shares are a hybrid form of equity that includes debt-like
features such as a guaranteed dividend.
Retained Earnings: Retained earnings refers the portion of net profit which is not
distributed to the shareholders and retained in the business for future re-investment in
the business or outsides of the business.
 The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital
in which each category of capital is proportionately weighted

Chapter Two = Capital Budgeting

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1. Pay Back Period(PBP) :- The payback period refers to the amount of time it takes
 to recover the cost of an investment. It shows the time frame for investment
amount return.
OI - CCFAT of PY
PBP = PY +
CFAT of RY
Here,
PY = Previous Year,
RY = Recovery Year
OI = Original Investment
2. Average Rates of Return(ARR):- The average rate of return is the average
annual amount of cash flow generated over the life of an investment. It Shows
the average rates from different years return.
Average EAT
ARR = × 100
Average Investment
Investment - SV
Average Investment =W.C. + S.V. +
2
3. Net Present Value(NPV):- Net present value (NPV) is the difference between the
present value of cash inflows and the present value of cash outflows over a
period of time. It Shows the present value of future return.
NPV = Total PV – Investment
4. Internal Rates of Return(IRR):- The Internal Rate of Return (IRR) is the discount
rate that makes the net present value (NPV) of a project zero. It Shows the
interest rate which converts NPV= 0.
NPV of LDR
IRR = LDR + × (HDR – LDR)
NPV of LDR - NPV of HDR
Here,
LDR = Lower discount rate
HDR = Higher discount rate
5. Profitability Index(PI):- Profitability index (PI), also known as profit investment
ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment
of a proposed project. It Shows the cost-benefit ratio.
PV of Investment
PI =
Actual Investment
Techniques on the basis of Certainty and Uncertainty
Under Certainty
Discounted cash flow method:
i) Net present value (NPV)
ii) Internal rate of return (IRR)
iii) Profitability Index (PI)
Non-discounted cash flow method:-
i) Payback period (PBP)
ii) Average rate of return (ARR)

Under Uncertainty
i) Standard deviation (SD):- A standard deviation is a statistic that measures
the dispersion of a dataset relative to its mean.
ii) Co-efficient of variation (CV):- The coefficient of variation (relative standard
deviation) is a statistical measure of the dispersion of data points around the
mean. 
iii) Decision tree model: Decision Trees (DTs) are a non-parametric supervised
learning method used for classification and regression.
iv) Simulation approach:- The stimulation approach can be defined as the
approach to treatment that employs strong, controlled, and intensive auditory
stimulation of the impaired symbol system as the primary tool to facilitate
and maximize the patient's reorga- nization and recovery of language.

Types of decision:-
i) Accept – reject decision:- all those investment proposals which yield a rate of
return greater than cost of capital are accepted and the others are rejected.
ii) Mutually exclusive decision:- It includes all those projects which compete
with each other in a way that acceptance of one precludes the acceptance of
other or others.
iii) Capital rationing decision:- Capital rationing refers to the situations where the
firm has more acceptable investment requiring greater amount of finance
than is available with the firm.
Application of capital budgeting:-
a) To purchase fixed assets
b) Machinery replacement or not
c) Selection of best one among various alternative
d) Introduction of new project.
e) Expansion of business or not

Decision Criteria:

1. PBP → Lower PBP

2. ARR → ARR > Cost of Capital
3. NPV → Positive NPV or Higher Positive NPV
4. IRR → IRR > Cost of Capital

5. PI → PI > 1.

Scrap Value:- Scrap value is the worth of a physical asset's individual components when
the asset itself is deemed no longer usable.

Cost - SV
Depreciation =
Estimated Life

Chpater:3 Dividend Policy

Definition:
The portion of net profit paid to the shareholder is called dividend.
Types of Dividend:
Cash Dividend→ Dividend paid in cash.
Stock Dividend → Dividend paid in extra share
Dividend Payment Procedures in BD:
There are four steps in dividend payment process:-
Declaration Date: The date when percentage of dividend declared by the board of
directors (BODs). > June 10
 Record Date: It is the last date for including / register shareholders name in the
company’s register book. If anyone fails to register, he will not get dividend. >
July 5

Ex-Dividend Date: It is the last date for including new shareholders name in the
company’s register book who has just completed the buy-sell procedure.
Generally, it is the two days before the record date. > July 7

Payment Date: The date when dividend paid to shareholders.

> August 5

Dividend Theory:
Walter Model

Gordon Model

M-M Model

Walter Model

Here,
P0 = Market price of share.
r = Internal Rate of Return.
k = Cost of Capital.
E = EPS (Earning per Share).
D = Dividend P/S.
Gordon Model

Here,
b = Retention ratio.
M-M Model
1.Calculation of share price
P1 = P0 (1+k)-D1
Where,
P1 = Market price at end of year.
P0 = Market price at beginning of year.
D1 = Dividend at end of year.
K = cost of capital.

2. Number of new share to be issued

mP1 = I - (x - nD1)
Where,
I = New Investment
X = Net profit
N = Number of existing share
M= Number of new share.
3. Value of firm
Where,

V= Value of firm.