Financial Management: Valuation of Companies and Investment Appraisal Techniques

FINANCIAL
MANAGEMENT

Contents
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
Question 2 – Mergers and Takeovers......................................................................................................3
Question 3: Investment appraisal techniques...........................................................................................8
CONCLUSION........................................................................................................................................15
REFERENCES........................................................................................................................................16

INTRODUCTION
In general, the financial management can be understood as a form of function which is
connected to effectively management of financial aspect of a company (Chandra, 2020). Under
financial management various kinds of activities are managed such as profitability, return, cost
and many more. This is the duty of financial managers to make effective use of all available
financial resources by making appropriate allocation. The objective of this project report is to
understand about different kinds of financial terms as valuation of companies for acquisition,
analysis of projects under investment appraisal methods. The report contains two questions
which are based on theoretical and practical application of merger & acquisition as well as on
different investment appraisal techniques.
MAIN BODY
In the project brief, there are three questions and out of these two questions have been selected
which are question two and three. Underneath, detailed solution of these questions has been done
in such manner:
Question 2 – Mergers and Takeovers
Overview: This question is based on valuation of company with an aim of acquiring. As per the
given information, it can be find out that Aztec plc is going to take over Trojan plc in upcoming
time period. For this purpose, detailed valuation of Trojan plc has been done so that managing
director of Aztec plc can determine that whether they should acquire or not this company.
(a) Price earnings ratio- Share price / Earnings per share
In order find out value of price earnings ratio, there should be availability of information
about share price and earnings per share. In accordance of brief, following information
are available such as:
Price of each share £2.05
Number of share outstanding 147 Million
Net income £40.4 Million

Computation of value of earnings per share:
EPS= Net income / Number of share outstanding
= £40.4 Million / 147 Million
= £0.27
From above part, value of both EPS and share price have been found, therefore price
earnings ratio will be as:
Price earnings ratio= £2.05 / £0.27
= 7.59
Interpretation: As per the above calculated value of price earnings ratio this can be find
out that Trojan plc is generating effective earnings from each share. Their earnings on
each share is around 0.27 pounds while value of each share is 2.05 pounds. Therefore,
price earnings ratio at 7.59 seems good to acquire Trojan plc by Aztec plc.
(b) Dividend valuation model:
Under this method, valuation is done in accordance of paid dividend during financial
year. There is a formula to apply this model that is as follows:
D1 / (1 + k) + D2 / (1 + k) 2 + D3 / (1 + k) 3 + D4 / (1 + k) 4.............
In this formula:
D1 refers to amount of dividend paid in 1st year.
D2 refers to amount of dividend paid in 2nd year.
D3 refers to amount of dividend paid in 3rd year.
D4 refers to amount of dividend paid in 4th year.
K refers to predicted rate of return