Financial Management: Right Issue and Scrip Dividends

This report discusses the concepts of right issue and scrip dividends in financial management. It covers the computation of shares issued and ex-right price, advantages of scrip dividends for shareholders and the company, and project evaluation methods such as payback period, accounting rate of return, net present value, and internal rate of return.

Financial Management

Table of Contents
Question 2........................................................................................................................................4
Number of the shares issued and ex-right price...........................................................................4
Question 3........................................................................................................................................8
(a)Project evaluation methods......................................................................................................8
b. Advantages and disadvantages of the project evaluation method.........................................12
CONCLUSION..............................................................................................................................15
REFERENCES .............................................................................................................................1

Introduction
Financial management refers to the planning, directing, controlling and organizing
financial activities like procurement and use of the funds of an entity. In other words, it means
the application of principles of general management to the financial resources of the company.
The present report is based on various aspects of financial management that reveals the most
appropriate right issue for the company and the shareholders along with the benefits of the scrip
dividends to the company and the shareholders. The study highlights the computation of the
number of shares that had been issued by Lexbel Plc and the earning per share for reflecting the
most suitable option in relation to the right issues. In second part of the research study project
evaluation methods are used to evaluate viability of the project. Results of the ARR, NPV, IRR
and payback period are analysed and it is identified that project is viable for the firm.

Question 2
Number of the shares issued and ex-right price
Ex-right price, it refers to the estimated share price of an enterprise that follows the right
issue. It has been estimated as the weighted average value of the price per share of the new and
existing shares. Right issue, it means an issue of the new shares in terms of cash to present
shareholders of an organization. Such shares have been issued at the price that is slightly lower
than the market price of the shares that is prevailing at a point of time (ElKelish, 2018). It has
been done for encouraging existing shareholders in taking up shares and in paying cash to the
company. The value of the theoretical ex-right price has been seen as usually low than share
price before the right issue.

Current
maret
price
Right issue price £1.90 £1.80 £1.60 £1.40
Funds to be issued £180,000 £180,000 £180,000 £180,000
New shares to be issued (Funds to be
issued/Right issue price)
94,737 100,000 112,500 128,571
Book value of ordinary shares of £0.50 £300,000
Numbers of shares
(Ordinary shares/price)
600,000
Current market value of the shares
(Number of shares*Current market price) £1,140,000
Funds raised through right issus £180,000
Final value market (Current
market + Funds to be issued)
£1,320,000
Total new shares after right issue ( New
shares issued+Number of shares) 694,737 700,000 712,500 728,571
Reserves shares £400,000
Total value of the company
(Book value of shares+rezerved) £700,000
Profit after tax (PAT) (Value
of the company*20%) £140,000
Earning from new funds (20%)
(Funds to be issue*20%) £36,000
Total earnings after right issue £176,000
Theoretical ex-right price (TERP)
(Final value market/Total new shares after right
issue) 1.90 1.89 1.85 1.81
New earning per shares (Total
earning after right issue/Total new shares aftre
right issue) 0.25(25p) 0.25(25p) 0.25(25p) 0.24(24p)
Form of the issue for right issue price
{(1/New shares to be issue)*Numbers of shares }
6.00 5.33 4.67
Issue of 1 for
6 right
shares held
Issue of 9 for
48 right
shares held
Issue of 3 for
14 right
shares held

From the above results, it has been observed that the third option is seen as the best for
the shareholders as well as for the company.
Shareholders could increase their exposure at a discounted value and could have a large
proportion of the shares on which they can earn returns in the future. On the other hand, the
company could make more expansion by creating larger share of the existing shareholders only
which in turn does not involve any cost and outsiders, or external parties cannot have stake over
it. Company should choose for the third option where the price of issuing the right shares
equates to 1.40. This the suitable option because employees get more shares at lower price and
the company will gain more and more employees in exercising the option of right issue.
Critically evaluating advantages of the scrip dividends with respect to shareholders and the
company
Scrip dividend refers to the new share of the company's or issuers' stock, which is being issued
to the shareholders rather than providing them with a dividend. Scrip dividends might be used
when an issue is having a very little amount of cash available in issuing the cash dividend but
still desire for paying the return to the shareholders in any manner (David and Ginglinger,
2016). Such dividends are also being availed to the shareholders as the alternative to the cash
dividend, which in turn rolled their dividend payments into a large number of the shares.
In other words, scrip dividends mean the process of facilitating the shareholders with a choice of
receiving the cash dividends or the dividend at the future period of time or the common stock
(Bernhart and Mai, 2016). At the time when the corporation issues the scrip dividends, it means
that the company is allowing the shareholders for increasing their holding size without incurring
any amount of the fees. Scrip dividends that are tied up with the common stock allow for issuing
the company in retaining and the facilitating and investors with an ability for increasing their
respective holdings within the corporation.
Advantages to the company

Scrip dividends help the company in preserving their cash position in case substantial, or a
majority of the shareholders takes up an option of the share. The share price of the company will
not be diluted if a small portion of the scrip dividend has been issued (Westhuizen, 2016). Scrip
dividends help an enterprise in enhancing its borrowing capacity as it results to decrease in the
gearing of the company by with issuance of the shares. It helps an entity in saving the cash as for
each and every shareholder which elects the shares, so it results in saving the money. Then they
could make use of the extra or additional cash for its operations or in paying down debt and
shoring up its balance sheet. In fact, it provides the companies in minimizing the risk regarding
increasing a liquidity position. This helps in raising market capitalization of corporate on stock
exchange by increasing the investors.
Advantages to shareholders
They have been given an option to choose for dividend or shares and deciding for the best
suitable option (French, 2015). Specifically, one of the investor might be a retiree who highly
depends on the cash dividends in paying off their living expenses. In such case, they would be
selecting the option of cash dividend, and on the other side, younger investors might desire for
owing more shares for the purpose of keeping it as the assets in order to get the future
appreciation in the prices or in earning higher returns. In case the shares are seen as undervalued,
they would liking or opting for the scrip dividends and would be electing in receiving the shares
(ElKelish, 2018). In such scenario, shareholders are benefited as they don't need to pay for the
transaction cost that they would be incurring when they had bought for the same number of the
shares through the brokerage account. Scrip dividends assist an investors with far more returns
and the financial gain opposing to cash dividends with passage of time.

Question 3
(a)Project evaluation methods
Calculation of depreciation
Asset cost £275,000
Useful life in years 6
Residual value at 15% from asset
cost £41,250
Total depreciation £233,750
Year depreciation £38,958.33
Depreciation refers to the amount by which value of the asset decreased over the time
period (What is depreciation., 2019). In order to compute depreciation straight-line method is
used and under this, some of the values are taken into account, and namely asset cost £275000
followed by the salvage value which is £41250 and life is 6. By using the straight-line method
computed value of depreciation is £38958.
i) Payback period (PP)
Year £ Cash flow
£Cumulative
cash flow
0 275,000 275,000
1 72,500 -202,500
2 72,500 -130,000
3 72,500 -57,500
4 72,500 +15,000(profit)
5 72,500 +87,500
6 (net cash flow+residual
value) 113,750 +160,000
Payback period= year 3+ £57,500/£72,500= 3+ 0.79= 3.79 years

The payback period is one of the easiest project evaluation methods because it is the
approach that helps the manager in identifying the total time up to which firm have to wait to
cover the cost of the project (Jiao and et al., 2016). In the above-given table, cash flows are
negative for three years out of 6, and it can be said that in the 3.79 years project cost will be
covered. On clear analysis of fact, it can be seen that half years of the project will be gone on the
recovery of the cost of the project. Hence, the project can be moderately considered viable for
the company.
ii) Calculation of Accounting Rate of Return (ARR)
Cash inflow £85,000
Cash outflow £12,500
Net cash flow
(Cash inflow – Cash outflow) £75,500
Step 1
Year £ Net cash flows
£ Residual
value £ Depreciation
Annual
profit
1 72,500 0 38,958.33 33,541.67
2 72,500 0 38,958.33 33,541.67
3 72,500 0 38,958.33 33,541.67
4 72,500 0 38,958.33 33,541.67
5 72,500 0 38,958.33 33,541.67
6(Cash flows + residual
value –year depreciation) 72,500 41,250 38,958.33 74,791.67
Step 2
Average profit = (year 1+…+year 6 profit) / numbers of years
£242,500.02 / 6 = £ 40,416.67
Step 3

Average capital = (initial cost + residual value) / 2 = (£275,000 + £41,250) / 2= £158,125
Step 4
ARR= Step2 / Step3 * 100% = £40,416.67 / £158,125 *100% = 25.56 % profitability
It is known as the Accounting Rate of Return (ARR) approach because in this accounting
profits are taken into account. ARR of the project is 25.56% which reflect that on an average
project can give a return of the 25.56% to the investor. Return is moderate, and it can be assumed
that it is viable for the firm only to some extent(What is ARR., 2019). It is recommended that
investment must be made on this project considering ARR.
iii) Calculation of Net Present Value (NPV)
Cost of capital 12% (R1)
Year £ Cash flows Cost of capital (12%)
(annuity table)
£ Present value (cash flow * cost of
capital @12% from annuity table)
0 (275,000) 1 (275,000.00)
1 72,500 0.893 64,742.50
2 72,500 0.797 57,782.50
3 72,500 0.712 51,620.00
4 72,500 0.636 46,110.00
5 72,500 0.567 41,107.50
6 ( cash flow +
residual value) 113,750 0.507 57,671.25
NPV1 (year 1+...+year 6)-
year0 44,033.75

Net Present Value (NPV) is also one of the most important methods because it reflects
the amount that remains after subtracting initial investment from the sum of cash flows
(Pinkerton and Higgins, 2018). In this approach, the present value factor is also taken into
account in order to compute the present value of the cash flows. The present value taken into
account is 12% (R1). It can be seen that NPV is £44,033.75. It is recommended that project is
viable for the company and investment must not be made on this project.
iv) Calculation of Internal Rate of Return (to two decimal place)
Increase cost of capital at 20% (R2)
Year £ Cash flows
Cost of capital (20%)
(annuity table)
£ Present value (cash
flow * cost of capital
@20% from annuity
table)
0 (275,000) 1 (275,000)
1 72,500 0.833 60,392.50
2 72,500 0.694 50,315.00
3 72,500 0.579 41,977.50
4 72,500 0.482 34,945.00
5 72,500 0.402 29,145.00
6 113,750 0.335 38,106.25
NPV2 -20,118.75
R1 = 12
R2 = 20
NPV1 = £44,033.75
NPV2 = -£ 20,118.75

IRR indicates the actual rate of return that can be generated and earned through the
project (Mohagheghi and et al., 2017). IRR in the above table is 17.52% which is high. Hence, it
can be said that project is viable and recommended that it must not be picked by the firm.
b. Advantages and disadvantages of the project evaluation method
Payback period
Advantage: One of the main merits of the payback period method is that its calculation
process is oversimplified in nature and due to this reason in the company any employee who
does not have technical knowledge can also apply this method on the data to evaluate the project.
One of the major strength of this method is that it reflects the duration in which investment
amount can be covered. Thus, just be viewing values, one can easily find out the duration or year
from where the company will start earning profit in the business. Thus, it can be said that there is
a huge significance of the payback period method for the managers because it does not require
technical skills to understand the results and to measure project viability. This is one of the major
merits of the payback period method.
Disadvantage: One of the major disadvantages of the payback period is that in this
technique, the concept of the present value is not used. Present value concept is complex, and
due to this reason, one who does not have knowledge can not make use of this approach (Samset.
and Christensen, 2017). Payback period reflects project viability by considering all years, but it
does not indicate the viability of the project by considering the current time period. Value of the
currency or money keeps on changing consistently due to change in the economic condition of
the nation. In case there is high volatility in the market in the future time period, then another

amount of cash flows can be seen in the future time period. Due to this reason project that seems
profitable in the current time period may become unprofitable in the future time period. Hence,
due to this reason, most of the managers prefer to use the method that takes in to account
discounted cash flows. No use of present value concept is one of the major demerits of the
payback period method.
Apart from this, another main demerit of the payback period method is that in this many time
project seems to cover the cost of the project in just two years, but cash flow decline elevates. In
such kind of situation, usually, the manager assumes that the project is viable, but actually, it can
not be considered profitable for the company (Meyer, Farley and Garman, 2015). This is because
in initial years cash inflow amount is high and due to this reason project seems profitable, but
after payback cash flow decline significantly, which is not good for the company. Hence, a
project that is covering project cost in two years but cash flow declined than in that case; it can
be assumed that the project actually is not profitable for the company.
Accounting rate of return
Advantage: One of the main merits of the accounting rate of return is that it indicates the
average return that can be gained on the project. It can be said that this method gives an entire
overview of the return that can be expected on the project on an average basis (Todorović. and et
al., 2015). Interesting fact and one of the most important fact is that in the calculation of
accounting rate of return earning after tax and depreciation is taken into account. Earning after
tax and depreciation reflects the profit that remains after paying all direct and indirect expenses
in the business. This method gives a clear overview of the entire project. Thus, it can be said that
the mentioned method makes one easy to make a choice about the project.
Disadvantage: One of the major disadvantages of the accounting rate of return method is
that in this approach present value concept is not taken into account. Thus, this method does not
reflect the return that can be gained in the current time period. This method does not reflect the
actual return that can be expected on the project. Hence, the accounting rate of return approach
only gives a clue of the viability of the project, and it actually does not provide information about
the actual project return ( Seredkin, Zabolotsky and Jeffress., 2016). Another demerit of this
approach is that it does not takes into account the life of the project and just consider the average
rate of return that the project can generate. There is a possibility that the project may give a 24%

return in 12 years. On another hand, there may be a project that gives a 20% return in 8 years. On
comparison, it can be said that project with ARR of 20% is viable because it is taking less time
and is giving a better return. Thus, it is another main disadvantage of the accounting rate of
return were just by focusing on the project average return percentage one can make the wrong
decision with respect to selecting a project.
Net present value method
Advantage: the main merit of the net present value method is that in this technique
present value concept is taken into account, and by using its present value of the project is
computed. In this approach, first of all cost of capital is determined by using a specific formula
or interest rate is taken into account. Interest rate is multiplied to the cash flows, and in this way,
the present value of the cash flows is calculated (Linzalone. and Schiuma, 2015). The present
value of the cash flow is summed up and from its initial investment amount is subtracted to
measure the viability of the project. This is the entire process that is followed to measure the
viability of the project. This approach reflects the value of the project in the today time period.
Thus, it becomes easy for the manager to estimate the viability of the project by considering the
current time period.
Disadvantage: One of the major demerits of the net present value method is that the
calculation of present value is complex as one needs to estimate the present value factor or cost
of capital. If one finance project from both equity and debt, then in that case formula of the
weighted average cost of capital need to be used. On another hand, if the entire project is
financed through debt then in that case rate of interest will be cost of capital for the project, and
that percentage will be used to calculate present value factor and the present value of the cash
flows. Another demerit of the net present value method is that individual that does not have
technical knowledge can not apply the net present value method to compute the viability of the
project. Thus, the company need an experienced and technical individual to make use of net
present value method accurately to evaluate or measure project viability.
Internal rate of return
Advantage: One of the main merits of the internal rate of return is that it indicates the
actual return that can be gained on the project. Managers relative to the average rate of return

prefer to use internal rate of return method because former indicate average return that can be
earned on the project but latter one reflect the actual return that can be generated through the
project (Advantages of internal rate of return method., 2019). Thus, it can be said that the
internal rate of return method is mostly preferred by the managers over the accounting rate of
return method.
Disadvantage: One of the major demerits of the internal rate of return method is that its
calculation process is complex and due to this reason, those who are technically expert do not
prefer to make use of this method. Another demerit of this method is that in this, it is assumed
that the earnings of the project will be invested in the same. If in any case average rate of return
on the project is not nearby to the internal rate of return, then, in that case, the profitability of the
project can not be justified.

CONCLUSION
By concluding the above report, it has been assessed that financial management plays an
important role in making payment of the taxes on a timely basis. Moreover, offering scrip
dividends to the shareholders provides them with an opportunity in gaining additional shares
which could be used in future for generating more and more returns in future. Investment
appraisal technique helps in making an appropriate selection of the project and also states the
profits generated through selection of the particular project. It is concluded that project
evaluation methods have great importance for the business firms. By making use of relevant
methods in better way choice between options can be made. However, there are some merits and
demerits of the project evaluation methods which must be taken into account before considering
any project viable for the business firm.

REFERENCES
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Securities Operations & Custody. 8(4). pp.306-310.
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low-cost sensor performance in a suburban environment in the southeastern United
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Pinkerton, J. and Higgins, K., 2018. Family support-linking project evaluation to policy analysis.
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decision-making. Public Organization Review. 17(1). pp.1-17.
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Todorović, M.L. and et.al., 2015. Project success analysis framework: A knowledge-based
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conventional methods of mining: exploration, resource estimation, environmental issues,
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Linzalone, R. and Schiuma, G., 2015. A review of program and project evaluation
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