APC Financial Management Assessment 2019

This document is an assessment on financial management, specifically focusing on long term finance and investment appraisal techniques. It provides calculations and evaluations of different techniques such as payback period, accounting rate of return, net present value, and internal rate of return. The document also discusses the benefits and drawbacks of investment appraisal techniques. The subject is APC Financial Management Assessment 2019.

APC Financial
Management Assessment
2019

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Question 2. Long term finance. ..................................................................................................1
Question 3...................................................................................................................................5
b. Critical evaluation of investment appraisal techniques with the help of its benefits &
drawbacks..................................................................................................................................10
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial management is one of the key aspect of all kinds of business entities. This is so
because in the absence of proper management of financial resources, it can be difficult for
companies to make proper utilisation (Finke, 2013). In other words, the term financial
management can be defined as a process of planning, managing and controlling different
financial activities by help of various types of activities such as ratio analysis, investment
appraisal techniques etc. The project report is based on two various task which are related to long
term finance and investment appraisal techniques.
MAIN BODY
Question 2. Long term finance.
(a) Issue of Right share- The issue of right share can be defined as a process of inviting existing
shareholders to make purchase of additional new shares in company. This kinds of issue
provides securities to existing shareholders which is known as rights (Schmidgall and
DeFranco, 2016). By help of this right, shareholders can buy new shares at a discount to
market price on a fixed future date. Such as in the aspect of above Love-well limited
company, this can be find out they want to issue right shares among existing shareholders
with an objective of completing financial needs. In regards to right issue, herein underneath
some calculations are done that are as follows:
Lexbel plc wishes to rise: 180000 Pounds
Current ex-dividend market-price of Lexbel plc: 1.90 Pounds
3 assorted rights-issue prices recommended by corporation's finance director: GBP1.80, GBP
1.60 and GBP1.40
Right issue of Lexbel plc
Aggregate (no.)Ordinary shares (@ 50 for
each) 300000 Pounds
Add: Aggregate Reserve 400000 Pounds
Whole Sum 700000 Pounds
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Profit Post taxation ( 700000 pounds x 20
percent) 140000 Pounds
(I) Number of shares to be issued = (Aggregate Funds to be elevated / right issue prices)
Descriptions
Amount (in
pound except
shares)
Amount (in
pound except
shares)
Amount (in pound
except shares)
Exist number of share 600000 600000 600000
Fund to be raised (A) 180000 180000 180000
Suggested right issue prices (B) 1.80 1.60 1.40
Number of shares to be issued (A/B) 100000 112500 128571.43
(ii) Theoretical ex price: This is also known as TERP. It can be defined as a kinds of situation in
which stock and right attached to stock. The value of theoretical ex price is being calculated by
price for a business entity’s stock shares after issuing new right shares along with the assumption
which all new issued shares are considered by existing shareholders (Guastello, 2014). Basically,
the aim of this kinds of share is to produce additional capital with existing shareholders by giving
them priority. Offers of security rights can be common for investors. It is so because they can
produce arbitration by time of right offered.
Particular Condition one Condition two Condition third
Recommended right issue prices 1.8pound 1.6pound 1.4pound
Fund to be raised 180000 pounds 180000 pounds 180000 pounds
Number of shares needed to issue 1 lac shares 1.125 lac shares
128571.43share
s
Pre right issue 1140000 1140000 1140000
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Post right issue 1320000 1320000 1320000
Theoretical ex-right price 1.89 1.85 1.81
*Calculation of post right issue= [(600000*1.90) +180000] = 132000
(iii) Anticipated earnings per share (EPS) = This is computed by a particular formula which is as
follows:
Share before issue of rights x TERP/ Recent market price.
In the context of above given scenario, it can be find out that:
Recent market rate = 1.9
Number of shares available = 600000 shares
Return on shareholders’ fund = 140000 pounds
Working Note:
*Calculation of one right value:
1.90-1.89= 0.01
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1.90-1.85= 0.05
1.90-1.81= 0.09
*Calculation of Bonus fraction:
95238.1/1.89= 50390.53
97297.3/1.85= 52593.14
99447.51/1.81= 54943.38
*Calculation of fair value of each share:
180000/1.89= 95238.1
180000/1.85= 97297.3
180000/1.81= 99447.51
*Calculation of EPS:
600000X1.89/1.90= 1134000/1.90= 596842
600000X1.85/1.90= 110000/1.90= 584211
600000X1.81/1.90= 1086000/1.90= 571579
(iv) Form of issue of right issue price:
Particular Amount (in pounds)
Amount (in
pounds)
Amount (in
pounds)
Suggested right issue prices 1.8 1.6 1.4
Fund to be raise 180000 180000 180000
Number of shares to be issued: 100000 112500 128571.43
Exist number of share 600000 600000 600000
Ratio of new share to existing one 0.17 0.19 0.21
Issue of right share hold by present
shareholder
Issue of 1 for 6 right
share hold
Issue of 9 for
48 right share
hold
Issue of 3 for
14 right share
hold
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Analysis: On the basis of above calculation, there are three kinds of alternatives which are as
follows:
 The first situation is right issue of alternative rate of 1.80 will be 100000 shares of each.
Hence, shareholders must assign pro-rata one share to rest of six shares.
 The second situation is right issue of alternative rate of 1.6 will be 112500 shares of each.
Hence, shareholders must assign pro-rata nine shares to rest of forty-eight shares.
 The third situation is right issue of alternative rate of 1.4 will be 128571.73 shares of
each. Hence, shareholders must assign pro-rata three shares to rest of fourteen shares.
(v) Evaluation of best option among these above mentioned alternatives.
In accordance of above mentioned three alternatives, it can be find out that suggested
value of right share of 1.8 pound for each share will be beneficial for above mentioned company.
It is so because of value of expected earnings per share is higher in this option as compare to rest
of two options.
(c) Evaluate the benefits of scrip divided in context of shareholders or companies
Scrip dividend- This can be defined as a type of dividend which is issued by companies
instead of a common dividend. It is being useful for those business entities who issues lack of
cash dividends (Argerich, Hormiga and Valls-Pasola, 2013). The shareholders may be provided
scrip dividend as an alternative to monetary dividend in order to carry their dividend pay-out.
Basically, this type of dividend is suitable for both to the shareholders and company. It is so
because shareholders do not need to pay any sort of transaction charges, commissions etc. As
well as for companies, it becomes easier to protect cash dividend for rest of business activities.
Herein, below some key benefits of this type of dividend are mentioned in such manner-
Advantages of scrip dividend for companies:
 This is beneficial for companies in order to maintain cash position effectively. It is so
because under this business have option to issue of shares instead of issuing cash
dividends.
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 In addition, issuing of scrip dividend leads to enhancing leverage and gearing condition
of business entities (Beracha and Skiba, 2014). It is so because issuing shares as a
dividend as compare to cash help them in improved leverage condition.
 A company whose goodwill and brand value is effective can issue this shares when they
do not have enough amount of cash to pay shareholders.
 In addition, if companies issue scrip dividend at lower rate than it will not affect to their
share prices. On the other hand, in the case of cash dividend this is not possible because if
a company issues lower cash dividend then their share prices may be fell down.
 As well as this is one of the key source of finance instead of cash dividend.
Advantages of scrip dividend for shareholders:
 One of the key benefit of this type of dividend for shareholders is that it benefits them in
tax savage.
 This is beneficial for those shareholders who want to raise their shareholding in a
particular business entity. As well as it helps them in savage of transaction costs.
 This dividend contributes in order to increase investors in the firm because of higher
range of retaining power that may raise value of assets (Halstead, Jones, Lesseig and
Smythe, 2016).
 Another benefit of the scrip dividend for shareholders is that they can gain financial
advantage because of time interval of cash dividend.
 As well as another advantage of scrip dividend for investors is that they can increase their
equity shares without providing any extra charges like commission, purchase fees and
many more.
So, these are some main benefits of scrip dividend for both to the company and shareholders.
Question 3. Investment appraisal techniques.
Overview- This question is related to investment appraisal techniques. Under it, various kinds of
techniques are applied in order to evaluate efficiency of project of Love-well limited company.
In order to assess effectiveness of this company, below mentioned techniques have been applied
in such manner:
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(a) Calculations-
(I) Payback period method- Initial investment / cash flow (when there is equal cash flow)
Initial investment = 275000 pounds
Cash flow = Expected annual cash inflow – cash outflow
= 85000 – 12500
= 72500 pounds
Hence, cash flow = 275000 / 72500
= 3.79 years
So cost of this project will be recovered within 3 years and few months.
(ii) Accounting rate of return- Cash flow after depreciation / Initial investment x 100
Initial investment = 275000 pounds
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(iii) Net present value = Discounted cash flow – Initial investment
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Net Present value (NPV) = 318700 - 275000
= 43700 Pounds
(iv) IRR (Internal Rate of Return): LDR + PV of LDR – Initial investment / PV of HDR – PV
of LDR (HDR – LDR)
Herein,
LDR = Lower discounted rate
HDR= Higher discounted rate
PV = Present value
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Interval Rate of Return (IRR) = 12 + (318703 – 275000) / (254881 – 318703) x (20 – 12)
= 12 + 43703 / -63881 x (8)
= 12 + (-0.68) x 8
= 12 – 5.44
= 6.56 %
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Recommendation:
 Payback period- On the basis of above mentioned technique, this can be find out that cost
of project will be covered within 3.79 years. It shows that this project can be beneficial
for above company as cost of 275000 pounds will be recovered in shorter time frame.
 Accounting rate of return – Under this technique, expected rate of return is computed so
that efficiency of project can be evaluated. On the basis of above calculated amount of
ARR, it can be find out that company’s product will generate profit from rate of 12.19%.
So making investment in the project will be beneficial for Love-well limited company.
 Net present value- The net present value of Love-well company’s project is of 43700
pounds which is better. This shows that project will be beneficial for them if they will
make investment in this project as its present value is higher.
 Internal rate of return – The internal rate of return on the project of Love-well company is
of 6.76 %. It is indicating that making investment in this project will be beneficial for
them as this project will provide higher return.
b. Critical evaluation of investment appraisal techniques with the help of its benefits &
drawbacks
Payback period: This can be defined as a type of technique which is linked with process of
calculating estimated period of time that may occur in process of recovering cost of investment
(Lopes and Ferraz, 2016). It is very useful method in order to evaluate efficiency of projects in
an effective manner because by help of it companies can become able to compute time period.
Such as in the aspect of above Love-well limited company, their project has been evaluated
under this technique. This technique consists below mentioned benefits and drawbacks:
Advantages:
 It is quick to use and easily understood which is used to measure the time frame of the
project to regain invested amount. It included initial costs and additional cash balances to
get the project duration. These methods involve a several input data and an easy way to
measure the technique of capital money management.
 Keep providing information about the cash-flow, this technique provides data that is
essential to disclose the time required for the organization to come back the costs and
start earning profitability.
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Disadvantages:
 This method disregards the money value of time that is important to recognise the time
period.
 Not that these free cash flow are secured, they protect the original investment and leaving
the succeeding years’ cash flow. When considering the various future tasks, this can
leave good plan behind (Entwistle, 2015).
Accounting rate of return: This technique is also known as average rate of return. Under it,
estimated rate of return is computed on which profit may generated on different projects (Tsai,
2014). Such as in the above company’s project this technique has been applied in order to assess
efficiency of project. Similar as above technique, it has some limitations and benefits which are
as follows:
Advantages:
 This is the basic thing the development team in the firm understands. It involves the
actual time-saving with overall life of investment. The ARR recognizes the idea of net
earnings after tax and depreciation.
 The ARR technique provides a good image of the organization's revenue concentrations
of the venture. It also takes into account the bookkeeping idea for profit measurement at
various stages.
Disadvantages:
 It technique do not focus on the time value of money thus manager use to focus on
different sources of finance that has smaller return within long time period.
 The biggest disadvantages of this method is that the method cannot be applied to the
project in which investment are made on partial basis.
 This techniques of investment appraisal includes accounting revenues rather than cash
inflows that are crucial for calculating the actual return.
(iii) Net present value:
This is related to the method which support in ascertaining the actual value of net inflows
at present time which must be greater than the investment amount. NPV is used to make decision
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whether to select the proposal of investment or in case of negative cash inflows it is used to
search further project which cane give better positive results (Yeske and Buie, 2014). NPV
assists in assessing each year's expected cash-flow together with the discount era. The outcome
will also be positively or negatively. The method also involves discounted factor which is
consider to be crucial element that needed at the time of evaluating the real value of money. Thus
manager of company needed to recognise the suitable investment for company.
Advantages:
 The method of Net Present value includes every inflows of cash at the time of
investment. For the lender, this is necessary to take all cash-flow into the accounts and
calculate the current value (Kumari, 2015).
 Each framework takes into account the risk factor used to evaluate the cash flow of the
various projects. Such risk covers the possibility to companies, budgets and activities
implemented in different investment programs.
Disadvantages:
 Underneath the NPV technique, economic cost of selecting another project is hard to
examine the different projects within the same industry. Its rate where cash flow is to be
reduced is challenging for the management team
Many time is it not easy for the investor to make a profitable choice as company are very
optimistic with investment returns. Mainly the method of NPV do not includes the capital
allotment so selecting investment is not so easy.
(iv) IRR (Internal Rate of Return):
It's one of the basic methods of investment management which will be used among most
organisations to determine either proposal is successful or not so productive. Internal interest rate
on the basis of the reduced price period evaluating the present value and further identifying the
cash-flow for the particular project (Aravindan and Ramanathan, 2013). Until trying to make any
investment judgements, corporations have to analyse their investment using the capital financial
planning technique and take additional strategy accordingly. While determining on possible
investment, executives evaluate the IRR and greater the gain is beneficial to the company that
provides both productivity and future development. By using IRR are capable to determining the
risk associated with investment such as higher return involve more chances of risks.
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Advantages:
 IRR majorly include the time worth of money which is a crucial thing that help in
determining the profitable option for company (Rogers, Viding and Chamorro-Premuzic,
2013).
 The concept of IRR does not include rate of return in order to evaluate the cash inflows.
Disadvantages:
 All those business proposal which are exclusive are not included under this technique.
 There can be either positive or negative results in future.
CONCLUSION
In the end of this report, it is founded that from the financial control is extremely
necessary for the company to retain its financial position and strength in present business
environment. This includes the framework that focuses on the business and company's aspects or
activities. Manager use to make various tactics by considering business activities and overall
performance in order to increase the yearly profitability. Companies can choose the option scrip
dividend in order to increase the flexibility and liquidity and focus to maximise the shareholder
strength. By using different investment appraisal techniques manager are able to determine the
more suitable and advantageous expenditure option that have lower risk and gives more return.
The methods of payback period, ARR, NPV and IRR are used in determining the profitability of
operations.
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REFERENCES
Books and journal:
Finke, M., 2013. Financial Advice: Does it make a difference?. The market for retirement
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decision making in clubs: Review of the decade 2003–2012. International Journal of
Hospitality & Tourism Administration. 17(2). pp.179-197.
Guastello, S .J., 2014, September. Catastrophe models for cognitive workload and fatigue:
Memory functions, multitasking, vigilance, financial decisions and risk. In Proceedings
of the Human Factors and Ergonomics Society Annual Meeting (Vol. 58, No. 1, pp.
904-908). Sage CA: Los Angeles, CA: SAGE Publications.
Argerich, J., Hormiga, E. and Valls-Pasola, J., 2013. Financial services support for
entrepreneurial projects: key issues in the business angels investment decision
process. The Service Industries Journal. 33(9-10). pp.806-819.
Halstead, D., Jones, M .A., Lesseig, V. P. and Smythe, T .I., 2016. The customer orientation of
financial advisers. In Financial Literacy and the Limits of Financial Decision-
Making (pp. 246-259). Palgrave Macmillan, Cham.
Lopes, I. T. and Ferraz, D .P., 2016. The value of intangibles and diversity on boards looking
towards economic future returns: evidence from non-financial Iberian business
organisations. International Journal of Business Excellence. 10(3). pp.392-417.
Entwistle, G., 2015. Reflections on teaching financial statement analysis. Accounting Education.
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Tsai, C .F., 2014. Combining cluster analysis with classifier ensembles to predict financial
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Yeske, D. and Buie, E., 2014. Policy‐Based Financial Planning: Decision Rules for a Changing
World. Investor behavior: The psychology of financial planning and investing, pp.189-
208.
Kumari, S., 2015. An Impact of Financial Decision Making of Independent Women: Need for
Financial Inclusive Growth of Society. Asian Journal of Research in Business
Economics and Management. 5(11). pp.46-60.
Aravindan, R. and Ramanathan, K. V., 2013. Working Capital Estimation/Management-A
Financial Modeling Approach. Advances in Management. 6(9). p.4.
Rogers, J., Viding, E. and Chamorro-Premuzic, T., 2013. Instrumental and disinhibited financial
risk taking: Personality and behavioural correlates. Personality and Individual
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Beracha, E. and Skiba, H., 2014. Real Estate Investment Decision Making in Behavioral
Finance. Investor Behavior: The Psychology of Financial Planning and Investing.
pp.555-572.
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