Financial Management: Long Term Finance and Investment Appraisal Techniques

Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Question 2. Long term finance: Equity finance:....................................................................1
Number of shares to be issued...........................................................................................2
Theoretical ex-rights price.................................................................................................2
Expected earnings per share..............................................................................................3
Question 3. Calculation as accordance of investment appraisal techniques:.........................5
1.The Payback Period........................................................................................................5
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management is defined as a procedure which consists of crucial operations like
planning, organizing, controlling and monitoring financial resources with a view to acquire all
the organizational goals and objectives. To control financial activities require to focus on
different aspects such as procurement of funds, utilization of funds, payments, risk analysis and
many other related things. The application of financial management is conducting with and
examining money and investments for an individual or an organisation to support and make
business decisions in appropriate manner. It is categorised into three manner such as capital
structure, working capital management and capital budgeting (Akgün and et.al., 2014). Through
management analysis the requirement of financial activities in any business entity and leads to
take financial planning as per the concern. It is essential part which promote an organisation in
order to acquisition of funds. In this report consist of long term finance, equity finance where
analysis of different task of that linked with numerical task. This study involves impact of
evaluation of different advantages and key limitations of multiple differing investments
appraisals techniques.
TASK
Question 2. Long term finance: Equity finance:
(a) Earnings after tax (PATA) – 20% on shareholders funds
Capital structure:
£
Ordinary shares of 50 p each 300,000
Reserves 400,000
700,000
Raise £180,000 from a right issue
The current ex-dividend market price - £1.90
When the shares were issued the price per share was £0.50
Three rights issue price suggested: £1.80, £1.60 and £1.40
The shares of Lexbel plc have a nominal value of 50 p per share and a book value of £300,000.
Therefore there are 600,000 shares. Calculations: 300,000/0.50 = 600,000.
Current market value = 600,000 × £1.90 = £1,140,000
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Market value after rights issue = current market value + funds to raise from rights issue =
£1,140,000 + £180,000 = £1,320,000
(b) Determining following tasks requirements:
Number of shares to be issued
Funds raised through right issue = £180,000
Number of new shares at £1.80 = £180,000 / £1.80 = 100,000
at £1.60 = £180,000 / £1.60 = 112,500
at £1.40 = £180,000 / £1.40 = 128,571
Theoretical ex-rights price
The formula used for the calculations (Watson & Head, 2019, p. 115):
Pe = Pp × + PN ×
Where: Pe = the theoretical ex-rights price
Pp = cum rights price
PN = rights issue price
NO = number of old shares
Nn = number of new shares
N = total number of shares after the issue
Total number of shares after the issue (number of old shares + number of new shares):
At rights issue price of £1.80 = 600,000 + 100,000 = 700,000
£1.60 = 600,000 + 112,500 = 712,500
£1.40 = 600,000 + 128,571 = 728,571
The theoretical ex-rights price:
At rights issue price of £1.80: Pe = 1.90 × + 1.80 × = £1.89
£1.60: Pe = 1.90 × + 1.60 × = £1.85
£1.40: Pe = 1.90 × + 1.40 × = £1.81
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