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CAPEX Understanding Capital Expenditure with examples

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    9. Venture Capitalist Who Are They and What Do They Do
    10. CAPEX Understanding Capital Expenditure with examples
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Marketopedia / Basics of Stock Market / CAPEX Understanding Capital Expenditure with examples

Part 3- Banker

Three years down the line, the company has achieved great success.It decides to open up retail stores in at least three cities, accompanied by an increase in production as well as hiring of additional resources. Whenever an enterprise plans such expenditure it is termed as ‘Capital Expenditure’ or commonly known as ‘CAPEX’.

The management has estimated an amount of 30 Crs to cater to their CAPEX needs. It remains unclear how the company will be able to come up with this sum.

The company has a few ways to raise the funds for their CAPEX: 

  1. The company has made some gains in recent years; a portion of the CAPEX need can be covered through these profits, otherwise known as funding through internal accruals.
  2. The company could reach out to another venture capitalist, offering up shares of the company as part of a subsequent round of funding, also known as series B.
  3. The company can go to a bank for a loan as they have been doing quite well lately. Banks will then provide a loan, also known as debt.

Assuming the company uses all three methods to acquire capital for Capex, it can draw on 5 Crs of internal accruals, invite a venture capitalist to invest 10 Crs in exchange for equity, and borrow 15 Crs from a bank.

The increase of 10 Crs from the Series B investment has seen a rise in the company’s valuation, bringing notional profits to current investors. It really emphasises the potential wealth investors can generate by believing in an entrepreneur’s vision and backing them with a competent management team.

Some practical examples of such wealth creation include Indian companies such as Infosys, Avenue Supermarts (D-Mart), Eicher Motors, Titan Industries, and Bajaj Finserve, as well as international companies like Google, Apple, Amazon, among others.

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