NIT GRADUATE SCHOOL OF MANAGEMENT

SUMMER INTERNSHIP PROJECT SYNOPSIS

ON
“CAPITAL INVESTMENT & STOCK RETURN”
Submitted to
Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur
for the award of degree of
Master of Business Administration
course specialization in
‘finance’
Prepared by:

NIRAJ S. AGARKAR
Under the guidance of:
Organizational Guide : Mr. DEEP GAJBE
Academic : Dr. SHRADHA WILFRED

2017 – 2018
Survey No. 13/2, Mahurzari, Katol Road, Nagpur – 441 501

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Executive Summary

Capital investment refers to funds invested in a firm or enterprise for

the purpose of furthering its business objectives. Capital investment may also refer
to a firm's acquisition of capital assets or fixed assets such as manufacturing plants
and machinery that is expected to be productive over many years. Sources of
capital investment are manifold and can include equity investors, banks, financial
institutions, venture capital and angel investors.

While capital investment is usually earmarked for capital or long-life assets, a

portion may also be used for working capital purposes. Capital investment
encompasses a wide variety of funding options. While funding for capital
investment is generally in the form of common or preferred equity issuances, it
may also be through straight or convertible debt. It may range from an amount of
less than $100,000 in seed financing for a start-up to amounts in the hundreds of
millions for massive projects in capital-intensive sectors such as
mining, utilities and infrastructure.

Capital investment is concerned with the deployment of capital for long-term uses.
Companies make continual capital investment to sustain existing operations and
expand their businesses for the future. The main type of capital investment is in
fixed assets to allow increased operational capacity, capture a larger share of the
market and in the process, generate more revenue. Companies may also make
capital investment in the form of equity stakes in other companies' operations,
which indirectly benefits the investor companies by building business partnerships
or expanding into new markets.

Companies make conscious decisions about what kind of capital investment and
how much of it they should have over time. This spells out the funding
requirements and therefore affects the choice of financing sources. The first

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funding option is always a company's own operating cash flow, which sometimes
may not be enough to satisfy the amount of capital expenditures required. It is
more likely than not that companies will resort to outside financing, debt or/and
equity to make up for any internal cash flow shortfall.

Capital investment is meant to benefit a company in the long run, but it nonetheless
has some short-term downsides. Intensive, ongoing capital investment tends to
reduce earnings in the interim, strain on liquidity from payment demand on interest
and maturing principals, and dilute earnings and ownership if new equity is used.

Funds raised as long-term capital should be for long-term purposes of capital

investment to make comparable returns and adequately cover related financing
costs. However, to maintain uninterrupted operations, companies need to have
extra current assets over total current liabilities as an added assurance for meeting
any due obligations. Short-term funds set aside as such are commonly referred to
as working capital and may come from long-term capital, whose longer maturity
dates are typically beyond the due dates of any current liabilities. As a result,
companies sacrifice some long-term return to ensure short-term liquidity

Definition

‘‘The term Capital Investment has two usages in business. First, capital
investment refers to money used by a business to purchase fixed assets, such as
land, machinery, or buildings.

Secondly, capital investment refers to money invested in a business with the

understanding that the money will be used to purchase fixed assets, rather than
used to cover the business's day-to-day operating expenses.

For example, to purchase additional capital assets a growing business may need to
seek a capital investment in the form of debt financing from a financial institution
or equity financing from angel investors or venture capitalists’’

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INTRODUCTION OF CAPITAL INVESTMENT

& STOCK RETURN

Every growing business needs capital to invest in expanding productive

capacity, hiring more employees, updating technology, building new facilities, and
working toward key strategic business objectives.

Now that the economy seems to finally be back on solid footing, more CEOs and
small business owners are feeling optimistic and are ready to start investing again.
According to The Wall Street Journal/Vistage Small Business CEO survey, 51
percent of CEOs of small private firms said in August 2014 that they planned to
increase their capital spending in the next 12 months. But one question that many
small business owners struggle with, especially if it’s their first time leading the
company through a period of significant growth, is: “now that you have financing
for your business, what's the ‘right’ way to invest it?”

Fast-growing businesses always have a lot of needs for investment, and a lot of
possible places for that business capital to go: employees, infrastructure,
marketing, systems, equipment, or all of the above. The challenge comes with
business owners who worry that they are investing in the “wrong” things. Small
business owners who are used to running their company as a lean, minimalist,
bootstrapped operation often feel a bit of anxiety when it comes time to actually
start investing some serious cash into the business. What if you get it wrong? What
if your investments don’t pay off? What if you’re spending money in the wrong
way, and it won’t result in the growth and success that you had envisioned?

We talked with management consultant Matt Turner, founder of the consulting

firm Boston Turner Group, about the overall landscape for how fast-growing
businesses tend to invest their capital, the biggest opportunities of investing for
growth, and how these trends are shaping up for 2015. Matt said that the good
news is that 2015 is looking to be a good year for growing businesses to raise
capital and invest in further growth.

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Stock Retrun

There are a number of ways to calculate the investment return of an

account. We discussed some of these (real return, total return and risk-
adjusted return) in the Quantitative Methods section, and bond yields (yield-
to-maturity, yield-to-call and the real interest rate) were discussed in the
Fixed Income Secutities section. You will not be tested on the actual
formulas, so we have not included them here (other than those provided for
clarity). In this section we'll focus on return measures:

Return Measures

 Return on investment (ROI) - this is the classic measure of performance,

taking into account all cash flows (including dividends, interest, return of
principal and capital gains). To calculate, simply divide the sum of all cash
flows by the number of years the investment is held and then divide that
amount by the original amount invested.
 Risk premium - the risk premium is the higher return that is expected for
taking on the greater risk associated with investing in a growth stock, versus
a stock from a more established company.

 Risk-free rate of return - the current rate for Treasury bills is typically used
in calculations, such as risk-adjusted return and the Sharpe ratio.
 Expected return - since the expected return is the average of the probability
of possible rates of return, it is by no means a guaranteed rate of return.
However, it can be used to forecast the future value of a portfolio and also
provides a guide from which to measure actual returns.

 It is an integral component of the Capital Asset Pricing Model, which

calculates the expected return based on the premium of the market rate over
the risk-free return, as well as the risk of the investment relative to the
market as a whole (beta).

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Characteristics

A capital investment involves a current cash outlay in anticipation of realizing

benefits in the future, generally (well) beyond one year. These benefits may be
either in the form of increased revenues or reductions in costs -the expenditures are
called accordingly as income-expansion, or cost-reduction, expenditures. The cash
outlay (as capital expenditure) may go towards addition, disposition, modification,
creation and replacement affixed assets. The basic features of capital investment
decisions are thus :

1. a series of large anticipated benefits;

2. a relatively high degree of risk; and
3. a relatively long period over which the returns are likely to be realised.

It must be mentioned that the following descriptions are used synonymous : capital
investment decision, capital expenditure decision, capital expenditure
management, long-term investment decision, management of fixed assets, capital
budgeting decision.

The simplest assumption underlying capital investment decisions is that the

required rate of return is given and is the same for all investment projects. This rate
of return is designated as the minimum acceptable rate of return (MARR). This
assumption presupposes that the selection of any investment project does not alter
the L'business-risk companion" of the firm as visualised by the suppliers of capital.
Thus, risk, and rate of return are important considerations in capital investment
decisions; generally, unless otherwise indicated, risk is held to be constant. Of
course, the rate of return may vary with the risk.

Strategic decisions in regard to capital investment may lead to significant changes

in the firm's expected profits and in the risks to which these profits will be
subjected to. These changes may influence stockholders and creditors to revise
their evaluation of the firm.

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An investment decision at the right opportunity can boost the profits for quite a
few years to come; equally, an ill-advised investment [nay even lead to
bankruptcy. Besides this, other impacts on the firm due to any long-term
investment may include the following :

1. Any fixed investment is attended by certain fixed costs in terms of

labour, rents, insurance, staff salary, etc. and hence, the break-even
points, sales and profits for product ranges would be changed.

2. Capital investments, once made, are irrecoverable except with losses.

There may not be even scrap value in certain cases.

3. Since funds are blocked on the acquired fixed assets, other investment
opportunities may not be financed for want of funds; and thus, besides
losses on this asset, potential profits from alternate investments are
also lost.

Since future is generally uncertain, there is always an element of risk in estimating

the future benefits from an investment. Reliable forecasts of market demands,
market share for the firm, consumer preferences, competitors' actions and offers,
technological development, changes in economic and potential environment - are
the agglomerate of requirements to be carefully looked into. Quantifying the
benefits is thus often a "grey" area.

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ADVANTAGES OF CAPITAL INVESTMENT

 Capital budgeting helps a company to understand various risks involved in an

investment opportunity and how these risks affect the returns of the company.

 It helps the company to estimate which investment option would yield the best
possible return.

 A company can choose a technique/method from various techniques of capital

budgeting to estimate whether it is financially beneficial to take on a project or not.

 It helps the company to make long-term strategic investments.

 It helps to make an informed decision about an investment taking into

consideration all possible options.

 It helps a company in a competitive market to choose its investments wisely.

 All the techniques/methods of capital budgeting try to increase shareholders wealth

and give the company an edge in the market.

 Capital budgeting presents whether an investment would increase the company’s

value or not.

 It offers adequate control on expenditure for projects.

 Also, it allows management to abstain from over investing and under investing.

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DISADVANTAGES OF CAPITAL INVESTMENT

1. All the techniques of capital budgeting presume that various investment

proposals under consideration are naturally exclusive which may not practically be
true in some particular circumstances.

2. The technique of capital budgeting requires estimation of future cash flows and
outflows. The future is always uncertain and the data collected for future may not
be exact. Obviously, the results based upon wrong data can be good.

3. There are certain factors like morale of the employees, good-will of the firm
etc.’ which cannot be correctly quantified but which otherwise substantially
influence the capital decision.

4. Urgency is another limitation in the evaluation of capital investment decisions.

5. Uncertainty and risk pose the biggest limitations to the techniques of capital
budgeting

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Objectives

The options for investing savings are continually increasing, yet every investment
vehicle can be easily categorized according to three fundamental characteristics:
safety, income and growth.

Those options also correspond to types of investor objectives. While an investor

may have more than one of these objectives, the success of one comes at the
expense of others. Let's examine these three types of objectives, the investments
that are used to achieve them and the ways in which investors can incorporate them
into a strategy.

Perhaps there is truth to the axiom that there is no such thing as a

completely safe and secure investment. Yet we can get close to ultimate safety for
our investment funds through the purchase of government-issued securities in
stable economic systems, or through the purchase of the corporate bonds issued by
the economy's top companies. Such securities are arguably the best means of
preserving principal while receiving a specified rate of return.

The safest investments are usually found in the money market. In order of
increasing risk, these securities include: Treasury bills (T-bills), certificates of
deposit (CD), commercial paper or bankers' acceptance slips, or in the fixed
income (bond) market in the form of municipal, and other government bonds and
corporate bonds. As they increase in risk, these securities also increase
potential yield.

There's an enormous range of relative risk within the bond market. At one end are
government and high-grade corporate bonds, which are considered some of the
safest investments around. At the other end are junk bonds, which have a
lower investment grade and may have more risk than some of the more speculative
stocks. In other words, corporate bonds are not always safe, although most
instruments from the money market can be considered very safe.

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Bibliography

 http://www.shareyouressays.com
 http://educ.jmu.edu
 www.investopedia.com
 https://en.wikipedia.org
 https://www.newconstructs.com/education-invested-capital

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