Financial Management: Equity Finance, Investment Appraisal Techniques

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 2. Long term finance: Equity finance......................................................................3
Question 3. Calculation as accordance of investment appraisal techniques..........................8
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
The term financial management can be defined as a form of methodology that is related
to the preparation, organization and management of financial activities (Purce, 2014). In the
aspect of businesses, it is compulsory to manage overall resources in a better way whether this is
monetary or non-monetary. For the management of financial resources, there are different types
of techniques which are implemented by companies. Moreover, all forms of business need this to
handle their financial resources, whether they are small or large. The project report is based on
various different contexts of financial management which bring out effective right issue for
business entities and stakeholders. As well as importance of scrip dividend is also mentioned.
The report covers calculation of number of shares which have been issued by Lexbel company.
In the next part of report, different methods of investment appraisal techniques are applied such
as NPV, IRR, ARR etc. to know efficiency of given project.
MAIN BODY
Question 2. Long term finance: Equity finance.
Right issue: Lexbel company decided to raise 180000 by the rights issue in order to create an
extension in existing operations. Financial data is listed below:
Current
market
price
Right issue price £1.90 £1.80 £1.60 £1.40
Funds to be issued £180,000 £180,000 £180,000 £180,000New 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 £176,000Theoretical 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
Theoretical ex-rights price - It is defined as a business entity's expected share price after a proper
issue. It is usually anticipated as a weighted average stock price of new and existing shares.
Organizations can use a new issue of the right to sell investors more shares, typically at a
reduced price (Chen, Lin and Lee, 2012). Share prices are influenced by the granting of new
rights as it increases the number of shares outstanding. Usually, the theoretical ex-rights price is
computed instantly and the first day of a public offering of rights.
The issue for each right issue price:
 For each share, the number of shares improved by the organization will be 100,000 shares
with respect to the rights issue of 1.80. As a result, the pro-rata one share will be assigned
by stockholders to current six shares.
 For each share, the number of shares improved by the organization will be 112500 shares
with respect to the rights issue of 1.60. As a result, the pro-rata nine shares will be
assigned by stockholders to current 48 shares.