Business Finance

This analysis covers topics such as calculating Cash Conversion Cycle, NPV and IRR of projects, WACC, and dividend payment size. It also suggests practical considerations and legal requirements for dividend payment.

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Business Finance

Contents
INTRODUCTION...........................................................................................................................9
Question 1........................................................................................................................................9
Calculate the following:...............................................................................................................9
a) Calculating the Cash Conversion Cycle..................................................................................9
b. State whether to accept the factoring decision and also state whether the amount saved can
be utilised...................................................................................................................................11
Question 2......................................................................................................................................11
With the help of Net present value method, Project A and Project B NPV is calculated and
better project from them is suggested:.......................................................................................11
b) Value of project A and project B evaluated with the help of internal rate of return method.
...................................................................................................................................................13
c)If the cost of capital has seen an increment to 20 percent in 5th year, what will be the advice
then:...........................................................................................................................................14
Question 4......................................................................................................................................14
a) Compute the weighted average cost of capital (WACC) using the market weightings........14
b) There are some justifications described about the company’s structure regarding their
capital and how they can reduce the WACC:............................................................................14
Question 6......................................................................................................................................15
a) The amount of the annual dividend to be paid to shareholders, as well as the practical
considerations to be taken into account when establishing the dividend payment size:...........15
Practical considerations must be made when determining the size of the dividend payment:..15
Effects of the three options given in the question which are related to the wealth of a
shareholder owning 1250 shares in Squeezeco:........................................................................16
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The analysis compares two Better plc projects and calculates the net present value and
internal rate of return of the given data, allowing the company to select one of the best projects
from the two exclusive Better plc initiatives (Artuso and Leamon, 2021). It also suggests that if
the firm's cost of capital increases by 20% in the next five years, the company should adjust its
cost of capital. They find the ex-rights price per share in another query. The hanging valley plc's
net cash raised and the value of its rights, as well as the benefits and drawbacks of the right issue
in the last question, it determines the planet plc's fair price and new pricing. It also identifies a
problem with the dividend growth model of the company.
Question 1
Calculate the following:
a) Calculating the Cash Conversion Cycle
CCC = DIO + DSO – DPO
= 83.13 + 33.21 – 45
= 71.34 Days
Where:
DIO=Days of inventory outstanding
(also known as days’ sales of inventory)
DSO=Days sales outstanding
DPO=Days payables outstanding
DSI = Average Inventory / Cost of Goods Sold * 365
= (2018 / 8860) * 365
= 83.13 Days
Where:
Avg. Inventory= ½ ×(BI+EI)

BI = Opening inventory
EI = Closing inventory
DSO = Average Account Receivables / Revenue Per Day
= 1092 / 32.88
= 33.21 Days
Where:
Avg. Accounts Receivable = ½ ×(BAR+EAR)
BAR = Beginning AR
EAR = Ending AR
Revenue per day = 12000 / 365
= £ 32.88 per day
DPO = Average Account Payables / Cost of goods sold per day
= 1092 / 24.27
= 45 Days
Where:
Average Accounts Payable= ½ × (BAP+EAP)
BAP = Beginning AP
EAP = Closing AP
COGS = Cost of Goods Sold
Significance of Cash Conversion Cycle
Cash Conversion cycle is used to determine the time period it requires to recover cash
from the business operations activity and Cash flow of the business. The shorter time business
takes to recover its amount from the debtors and rotates the cycle more it will be beneficial for
the business. The shorter the time period the more will be revenue for the organisation. It also
works as a comparison of the business activities from its competitors to determine the time
period it requires to recall its money from its business operations. Business can compare and
check how they are performing in the industry (Alemany and Andreoli, 2018).

The shorter the Cash Conversion Cycle it will improve the relationship between the
suppliers and also helps in knowing the performance of the business. High conversion cycle
states that the time period it requires to complete the cash conversion cycle which means that it
will take longer for the cash to convert back to liquid form.
b. State whether to accept the factoring decision and also state whether the amount saved can be
utilised.
Current Expenditure Factoring Cost
Particulars Amount Particulars Amount
Administration Cost 160000 Factoring Cost @ 2% 30760
Bad debts 7650 Interest Expenses 115350
Overdraft expenses 24000 Overdraft expenses 22277
Total Expenses 191650 Total expenses 168387
From the above it can be seen that the factoring aids the organisation in earning more as
compared to the traditional method which was adopted by the organisation in order to assist in
recovering the trade receivables of the organisation company can use the services of factoring.
By using factoring organisation will save 23263 on yearly basis.
The amount that is saved by employing factoring to the business will save overdraft expenses of
the company which is used by the organisation for using working capital of the business. The
finance can be utilised by the organisation in the business transactions
Question 2
With the help of Net present value method, Project A and Project B NPV is calculated and better
project from them is suggested:
Project A
Year Net Cash inflow (in Millions) PV factor @ 12%
Discounted cash
inflow
Year 1 40 0.892 35.68
Year 2 50 0.797 39.85

Year 3 60 0.711 42.66
Year 4 60 0.635 38.1
Year 5 80 0.567 45.36
Cash inflow of discounted factor 202.65
Net Present Value = Total cash inflow – Total cash outflow
= 202.65 – 150
= 52.65
Project B
Year Net Cash flow (in Millions) PV factor @ 12%
Discounted cash
flow
Year 1 80 0.892 71.36
Year 2 80 0.797 63.76
Year 3 50 0.711 35.55
Year 4 40 0.635 25.4
Year 5 30 0.567 17.01
Cash Flow 213.08
Net Present Value = Total cash inflow – Total cash outflow
= 213.08 – 152
= 61.08
Analysis: In the above table, the NPV of both projects are calculated. It is concluded that project
B has better value with comparison to project A. Project B is 8.43 more than the project A which
is due to better net present value.
b) Value of project A and project B evaluated with the help of internal rate of return method.
Project A

Period
Net Cash
inflow (in
Millions)
PV factor
@ 12% Cash Flow PV @
14% Cash Flow
Year 1 40 0.892 36 0.85 34
Year 2 50 0.797 40 0.72 36
Year 3 60 0.711 43 0.61 37
Year 4 60 0.635 38 0.52 31
Year 5 80 0.567 45 0.44 35
Net Present Value 202 173
IRR = LDR + (NPVL / NPVL – NPVH) * (HDR –LDR)
= 12 + (202 / 202 – 173) * (14 – 12)
= 12 + (202 / 29) * 2
= 12+ 13.93
= 25.93 %
Project B
Period
Net Cash
inflow (in
Millions)
PV factor
@ 12% Cash Flow PV @
14% Cash Flow
Year 1 80 0.892 71 0.85 68
Year 2 80 0.797 64 0.72 58
Year 3 50 0.711 36 0.61 31
Year 4 40 0.635 25 0.52 21
Year 5 30 0.567 17 0.44 13
Net Present Value 213 190
IRR = LDR + (NPVL / NPVL – NPVH) * (HDR –LDR)
= 12 + (213 / (213 – 190)) * (14 – 12)
= 12 + (213 / 23) * 2
= 12+ 18.52
= 30.52 %
Interpretation: According to the IRR calculations for both projects, project B is more feasible
than project A because it provides a higher return for a lower investment.
c)If the cost of capital has seen an increment to 20 percent in 5th year, what will be the advice
then:
If the cost of capital increase at the end of the 5th year, the it will become riskier for Better
Plc to invest in the company.

Question 4
a) Compute the weighted average cost of capital (WACC) using the market weightings.
Particular Amount Weights Cost of Capital WACC
Equity Share capital 200 0.10752688 18% 1.95%
Preference Share Capital 300 0.16129032 7% 1.13%
Reserves and surplus 150 0.08064516 24% 1.94%
Bonds 650 0.34946237 9% 3.15%
Bank Notes 560 0.30107527 9% 2.71%
Total 1860 1
WACC 10.87
%
Cost of equity = Rf + Beta * (Rm – Rf)
= 7% + 1.21 * 9.1% = 0.18 = 18.11%
b) There are some justifications described about the company’s structure regarding their capital
and how they can reduce the WACC:
The amount of overall capital is estimated at 18.11%. This will help the company in
different ways by reducing other uses as due to the completion of every change in capital, the
WACC will be diminished by 10.87%. For delivering effective outcomes for the anticipated
operations of business, Jordan Plc will be prepared to utilise the money and assets of the
company. To attain the hierarchical and effectiveness in business, there is a need to acquire new
equipment for effective utilisation.
The financial exchange and the promise of the party shares a bond through maintaining the
ratio of debt to equity. The companies like Jordan Plc are good enough in maintaining an
equilibrium between global and domestic resources (Gietzmann and Wang, 2020).
Weighted normal capital expense: This is a fee or payment of finance that should be placed
on the financial supporters of a component, specifically the owner. It isn't totally defined by
global communication or by the presence of directors. When inspected, variable values,
propensity tools, and commitments are listed.

Infrastructure refers to the mechanism that enables an organisation to manage its obligations
and securities transactions through representational contracts. This aids businesses in identifying
assets that are projected to scale and perform numerous jobs. The amount of time spent on
responsibilities, money transactions, and various safeguards may all be evaluated.
Question 6
a) The amount of the annual dividend to be paid to shareholders, as well as the practical
considerations to be taken into account when establishing the dividend payment size:
Dividends paid to shareholders each year:
Dividends are one-time payments made to shareholders in exchange for their investment in a
profit-generating stock, and they are deducted from the income statement. While the majority of
profits are maintained as capital appreciation, earnings that can be used for current and future
operations and serve a specific purpose can be transferred to investors as profits. Industries will
occasionally experience capital growth even if they do not earn enough money. Companies can
do this to maintain their long-standing dividend-paying tradition. Regardless of whether they
admit to the accounting goal, advisers have the authority to pursue that amount of money. When
a company needs money, it has two options: keep the entire proportion of benefits or avoid the
financial markets completely. Moreover, if the entire income is expected to be in the form of all
or reserved, no allocation is recorded. When calculating the dividend distribution, buyers should
take the following two factors into account (Kumar, 2022).
Practical considerations must be made when determining the size of the dividend payment:
Several obstacles that the firm has while determining the size of the dividend pay-out have
been noted, including:
Owners' tax strategy: One factor that influences financial decisions is the tax treatment of
stockholders. Those who would not be prominent in satisfactory distribution functions for a firm
with a considerable share capital that has had profit margin from numerous sources and are
grouped for a moderate-income scheme, because a substantial percentage of the monetary gain,
whether from reimbursement or through taxpayers, would still go aside. They also prefer
investment returns to cash earnings, which they obtain by distributing retained earnings or profits
at cost.

Legal requirements: When a dividend is declared, senior management should be aware of the
current limits. The United Kingdom has authorized many dividend pay-out and delivery laws
that firms must comply when paying dividends (Leckel, Veilleux and Dana, 2020).
Investor's preference: The customer's choice is the most important factor because they all have
different viewpoints and emotions. Besides that, investors are unconcerned about income; all
they need to do is evaluate the firm from which funds were raised to support new initiatives or
develop local industries.
Company growth requirements: Another factor that influences the cash dividend is the business
’s financial requirements. A company should not require more capital for acquisitions if it has
expanded adequately. However, if a corporation want to grow, more finances are required for
sustainability and success.
Effects of the three options given in the question which are related to the wealth of a shareholder
owning 1250 shares in Squeezeco:
1.Cash dividend:
Effect: As demonstrated in the above computation, the total cash dividend is estimated using the
company's current value of 1250 and the dividend pay-out of 15p. As a result, multiply both
values by 187.5 to get the total money dividend.
2. 5% Script dividend:
A script dividend is a fresh portion of an account holder's ownership distributed to investors in
place of a pay-out. Because financial institutions have limited capital to pay dividends, scrip
dividends will be used to repay investors in a specific way (Parekh, and Attuel-Mendès, 2021).
Buyers benefit because no transaction fees, including dividends, are required when purchasing
new assets. Avoiding dividend payments is another small way a shareholder can save money.

Effect: The 5% scrip dividend is dependent on the amount calculated. To calculate, combine
1250 total shares outstanding with 5% scrip dividend to get 62.5 and 432p share price to get 270
total dividends worth.
3.15% of ordinary share capital is repurchased at the current market price:
Creditors will need to design a creative method to enhance purchasing salaries by 10%.
Following portfolio recycling, the national debt percentage, including supported and unpacked
debt, would not exceed half of the firm's paid-up equity and underutilised assets, providing
additional reason for organisations to continue purchasing liabilities (von Danwitz, 2018).
Effect: To determine total shareholders, multiply 15 present of ordinary shares (187.5) by the
current share price of 432p. After adjustments, the investors will receive $716 of their total
assets.

CONCLUSION
With the assistance of some sources and, it is possible to conclude from the preceding report
that the usefulness of business finance in an organization. This report also computes various
types of factors that aid the company's explanations growth and expansion. These elements
include NPV and internal rate of return, weighted average cost of capital, annual dividend to
return to its shareholders and their practical issues, and the effect of given options on behalf of
the shareholders' power. All of these variables are useful for forecasting and making decisions in
the future.

REFERENCES
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Its Implications on Accounting and Finance (pp. 305-321). IGI Global.
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future research. International Journal of Project Management. 36(3). pp.525-541.
Zhongming, Z. and Wei, L., 2018. Mobilization of Private Finance by Multilateral Development
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