Capital Budgeting

and
Financing Decisions

MBA Second Year

(Financial Management)
Paper No. 2.3

School of Distance Education

Bharathiar University, Coimbatore - 641 046
 Author: K Raji Reddy

Copyright © 2008, Bharathiar University

All Rights Reserved

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 CONTENTS

Page No.

UNIT I
Lesson 1 Long-term Finance 7
Lesson 2 Public Issue 18
Lesson 3 Innovative Methods of Financing 28

UNIT II
Lesson 4 Investment Decision 45
Lesson 5 Risk Analysis in Capital Budgeting 87

UNIT III
Lesson 6 Capital Structure Decisions 105
Lesson 7 Cost of Capital 128

UNIT IV
Lesson 8 Leverage Analysis 153

UNIT V
Lesson 9 Financial Forecasting 175

Appendices 193

Model Question Paper 205

 CAPITAL BUDGETING AND FINANCING DECISIONS

SYLLABUS

UNIT I
Nature of Long term financial decisions - Sources of long term finance - public issue -
institutional finance - innovative modes of financing.

UNIT II
Estimation of cash flows - evaluation techniques - Project evaluation under risk and
uncertainty - sensitivity analysis - certainty equivalent - Decision tree approach Risk
adjusted discount rate approach - Analysis of non-financial aspects.

UNIT III
Capital Structure decisions - Cost of capital and capital structure determination optimum
capital structure.

UNIT IV
Leverage - Types -operating and financial leverage - combined leverages

UNIT V
Financial forecasting - determination of the ratio between debt and equity.