Business Finance: NPV, IRR, WACC, Rights Issue, Dividend Payment

This report covers various aspects of Business Finance including NPV, IRR, WACC, Rights Issue, and Dividend Payment. It includes calculations and critical discussions on each topic.

UGB223 BUSINESS
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
QUESTION 2..................................................................................................................................3
a) Compute NPV and suggest which project should be accepted...............................................3
b) Calculate IRR and on the basis of this which project should be accepted..............................4
c) If the cost of capital increase to 20 % in year 5, then does the changes would be advisable..5
QUESTION 3..................................................................................................................................5
a) The theoretical ex-rights price per share.................................................................................5
b) The net cash raised..................................................................................................................6
c) The value of the rights.............................................................................................................7
d) Critically discuss the advantages and disadvantages of rights issue.......................................8
QUESTION 4..................................................................................................................................8
a) Calculate the weighted average cost of capital (WACC) using the market weightings..........8
b) Critically discuss whether you consider that companies, by integrating a sensible level of
gearing into their capital structure, can minimise their weighted average cost of capital...........9
QUESTION 6..................................................................................................................................9
a) The size of the annual dividend to be paid to shareholders, as well as the practical concerns
to be considered while determining the dividend payment size..................................................9
b) Calculate the three options....................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
In the below report, business finance is explained and analysed with the help of various
factors. Business finance is the term that stated the number of funds acquired by the owner of the
company for fulfilling their needs that including acquiring top-up funds to finance business
management, starting a business, or dealing with the cash crisis faced by the company
(Achleitner and Braun., 2018). The following report consists of four questions; 2, 3, 4, and 6
where every question represents the different ways to implement the business adequately. In
question number 2, Net present value and IRR are calculated; in 3 questions, Theoretical ex-
rights price per share, net cash raised, the value of the rights, and advantages and disadvantages
of rights issue are computed and explained; In question 4, WACC is determined and discussed
and in the last question, size of annual dividend and effect of the three elements on the wealth of
a shareholder are explained.
QUESTION 2
a) Compute NPV and suggest which project should be accepted.
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
NPV = 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: By analysing both the net present value, it can be recommended that project B is better
than project A because the higher value of the NPV is referred well for the company. In Project
A and B, the result of NPV is 52.65 and 61.08 respectively which indicates project B is 8.43
more than Project A.
b) Calculate IRR and on the basis of this which project should be accepted.
Period Inflows PV @ 14% Cash Flow PV @ 18% Cash Flow
0 275,000 1 -275,000 1 -275,000
1 72,500 0.88 63,800 0.85 61,625
2 72,500 0.77 55,825 0.72 52,200
3 72,500 0.68 49,300 0.61 44,225
4 72,500 0.61 44,225 0.52 37,700
5 72,500 0.54 39,150 0.44 31,900
6 72,500 0.48 34,800 0.37 26,825
Residual value
at the end 41,250 0.48 19,800 0.37 15,263
Net Present Value 31,900 -5,262
Interpretation: According to the calculations of NPV both projects, it is determined that project A
is more sustainable than project B because it offers a higher return for a lower investment.

c) If the cost of capital increase to 20 % in year 5, then does the changes would be
advisable.
Years Inflows PV @ 12% Discounted Cash
Flow
0 275000 1 -275,000
1 72,500 0.89 64,525
2 72,500 0.80 58,000
3 72,500 0.71 51,475
4 72,500 0.64 46,400
5 72,500 0.57 41,325
6 72,500 0.51 36,975
Residual value at
the end
41,250 0.51 20,138
Net Present Value 48,838
QUESTION 3
Computation and description of the followings
Issue shares = 2 m
Nominal Value = £ 1
Issue price for market = 80%
Current market price = £ 2.75
Issue Costs = £ 50000
a) The theoretical ex-rights price per share
It is the value of the market price that goods will theoretically have pursuing a new rights
issue (Truby and Ismailov., 2022). This factor is typically utilised by a company to offer a large
number of shares to shareholders or investors. An organization's share price for each shareholder
is determined by the company's current share price.

From investor and shareholders' point of view, the stock right offering is a favourite event
from them because it creates the opportunity of simultaneous purchase and sale of a particular
asset in several markets to attainment few differences in their cost with the help of rights offering
given time (Barroco and Herrera., 2019).
Theoretical ex-rights price per share = (New Shares * Issue Price) + (Old Share * Market Price) /
(New Shares + Old Shares)
Particulars Condition 1 Condition 2 Condition 3
Recommended prices to issue shares £ 1.80 £ 1.60 £ 1.40
Fund to be increased £ 180,000 £ 180,000 £ 180,000
Number of shares required to issue £ 100,000 £ 112,500 £ 128,571
Pre right issue £ 1140,000 £ 1140,000 £ 1140,000
Post right issue £1320,000 £1320,000 £1320,000
Theoretical ex-right price £ 1.89 £ 1.85 £ 1.81
b) The net cash raised
The amount of net cash is obtained from the company financial statements. The value of
net cash is generally used by the company for estimating its cash flows during the period. In
other words, Net cash may also refer as the remaining amount collected by the company after
subtracting all expenses and tax.
The Following calculation is based on the information available by the formula:
Estimated EPS = Share before issue of rights * (TERP/ Current market price)
Given Information:
Current Market Rate = £ 1.90
Shares available = £ 600,000 shares
Return on shareholders’ fund = £ 140,000
Particulars Amount (in £) Amount (in £) Amount (in £)
Suggested right
issue prices
1.8 1.6 1.4
Fund to be raised 180000 180000 180000

Number of shares
needed to issue
100000 112500 128571.53
Pre right issue 1140000 1140000 1140000
Post right issue 1320000 1320000 1320000
Theoretical ex –
right price
1.89 1.85 1.81
One right value 0.01 0.05 0.09
Fair value of
shares
95238.1 97297.3 99447.51
Bonus Fraction 50390.53 52593.14 54943.38
Expected earnings
per share (EPS)
596842 584211 571579
c) The value of the rights
The value of the rights shares is calculated using a mathematical technique. A
subscription right's value is determined after the announcement is made and before the right
expires (Zhou and Li., 2019). The value of a stock option is influenced by the basic stock and
strike price, volatility, rate of interest, expiry date, and dividend.
Calculations:
Particular Amount (£) Amount (£) Amount (£)
Recommended right issue prices £1.80 £1.60 £1.40
Fund to be increase £180,000 £180,000 £180,000
Number of shares to be issued: £100,000 £112,500 £128,571
Exist number of shares £600,000 £600,000 £600,000
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
shares hold
Issue of 9 for
48 right shares
hold
Issue of 3 for
14 right shares
hold

d) Critically discuss the advantages and disadvantages of rights issue
A right issue is an excessive capital-raising mechanism utilised by the top-ranked
corporation. It is carried out when a company is experiencing a liquidity problem. The
corporation asks its current owners or investors for additional funds in exchange for the issuance
of discounted shares (Chang and Jo., 2019). As a result, this stock issue is known as the right
issue.
Advantages of Right Issue:
 Useful in raising capital: Unlike public offerings, the right problem is more of an internal
affair with fewer rules and regulations. The only protocol that remains in the right issue is
that before issuing new shares, listed businesses must file a letter of offer with SEBI and
stock exchanges for public discussion and approval..
 Organizer shareholder Inflation: The fact that the right issuance assists promoters in
increasing their shareholding turns out to be a huge benefit (Vaslavskaya., 2020).
Disadvantages of Right Issue:
 Limits are set for rising up capital: Typically, stock exchanges limit the amount of
money a firm can raise through a right issue. Furthermore, the restriction is usually
proportional to the company's current equity worth. As a result, if a firm's stock is
undervalued, obtaining capital through the appropriate issuance may put pressure on the
company..
 Decreasing goodwill of the company: The fundamental cause for the stock increase is
that the company's liquidity assets are insufficient in comparison to its present liabilities.
Typically, a reputable company will issue the appropriate shares in the market, negatively
impacting the company's goodwill and lowering its market position (Barnett and Sergi.,
2018). As a result, investors believe that organising is a problem in running a corporation.
QUESTION 4
a) Calculate 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) Critically discuss whether you consider that companies, by integrating a sensible level of
gearing into their capital structure, can minimise their weighted average cost of capital
The overall average capital equity is approximated to be 18.11% even without flexible in
terms. All the working capital requirement or changes are achieved, resulting WACC will be
decreased by 10.87%, and it assist firm in reducing their expenditures (Tran, Hoang and
Nguyen., 2021). Potential financial investments are made by the Jordan plc and it also analyse
investment possibilities by spending cash and other resources. Company has to decide about to
purchase new machinery that can utilise to increase productivity and accomplish company's
goals.
Gearing determines the relationship between a group of obligations and stock market. Jordan plc
is capable to manage equilibrium between home assets as well as international assets if it is a
usable proportion.
Weighted average capital cost: The weighted average capital cost is determined as a payment or
interest rate which would be imposed on the entity investor or particularly owners. It describes
an average cost of capital of a business from all sources which includes common stock, preferred
stock and bonds. Variable equity, preferred instruments and obligations are implemented when
they are examined (Fombang and Adjasi., 2018).
The capital structure is the model which helps a company to control and manage its debts and
stock markets by the involvement of employee.
QUESTION 6
a) The size of the annual dividend to be paid to shareholders, as well as the practical concerns to
be considered while determining the dividend payment size
The amount of annual dividends paid to shareholders:

A dividend is a one-time payment provided to shareholders in exchange for their
investment in a profit-generating stock, which is subtracted from the income statement. While
the majority of earnings are kept as capital appreciation, money that can be used for current and
future operations and has a specific purpose can be distributed to investors as profits. Industries
will occasionally experience capital growth even if they do not earn enough money. Companies
can do so to maintain their long-standing dividend-paying legacy (Tongpoon-Patanasorn., 2018).
Even if they admit to the accounting goal, advisers have the authority to pursue that amount of
money. When a corporation needs money, it can either keep the entire proportion of incentives or
avoid engaging in the financial markets entirely. Furthermore, no allocation is recorded if the full
income is expected to be in the form of all or reserved. Buyers should consider the following two
factors when calculating the dividend distribution.
The practical considerations that must be made while determining the size of the dividend
pay-out:
Various challenges that the corporation has while deciding on the size of the dividend
pay-out have been identified, including:
Owners' tax plan: The tax treatment of stockholders is one factor that influences financial
decisions. Those who would not be prevalent in decent distribution functions for a corporation
with a significant share capital that has had high profitability from several sources and are
clustered for a modest income scheme, because a significant portion of the financial gain either
from compensation or through taxpayers would still go away (Ejiogu., 2018). They also prefer
investment returns to cash earnings, which they do by distributing retained earnings from share
capital or profits at cost.
Legal requirements: Senior management should be aware of the current limits whenever a
dividend is declared. The United Kingdom has approved several dividend pay-out and delivery
rules, which corporations must adhere to when paying dividends.
Investor's choice: Because they all have different perspectives and sentiments, the most
important factor is the customer's choice. Furthermore, income is unimportant to investors; all
they need to do is assess the firm from which funds were raised to support new initiatives or
expand local industries.
Company growth requirements: Another aspect that determines the cash dividend is the firm's
economic requirements. If a business has grown sufficiently, it should not need additional funds

for acquisitions (Gan, Lv and Chen., 2021). However, if a company seeks to expand, more funds
are required for survival and growth.
b) Calculate the three options
Cash dividend:
Interpretation: The total cash dividend is computed using the company's current value of 1250
and the dividend payout of 15p, as shown in the above calculation. As a result, add both values
to get the total money dividend, which is 187.5.
5% Script dividend:
A scrip dividend is a new piece of an account holder's equity that is paid to investors
instead of a payout. Because financial institutions would have limited capital to pay dividends,
scrip dividends will be used to repay investors in a certain way (Baber., 2018). The advantage for
buyers is that they won't have to pay any transaction fees, including dividends, when buying new
assets. Another small way for a shareholder to save money is to forego paying dividends.
Interpretation: The 5 percent scrip dividend is calculated based on the amount computed. To
calculate, add 1250 total shares outstanding and 5% scrip dividend to obtain 62.5 and 432p share
price to get 270 total dividend worth.
Repurchase of 15% shares at current market price:

Lenders will need to devise a brilliant plan to increase buying salaries by 10%. Following
portfolio recycling, the national debt percentage, comprising supported and unpacked debt,
would not surpass half of the firm's paid-up equity and underutilised assets, which is another
rationale for organisations to continue buying liabilities.
Interpretation: According to calculations, to calculate total shareholders, multiply 15 present of
ordinary shares (187.5) by the current share price of 432p. Following the adjustments, the
investors will receive $716 of their entire assets.
CONCLUSION
From the above report, it can be concluded that usefulness of business finance in an
organization with the help of some sources and explanation. This report also calculates different
type of factors which helps the company in growth and expansion. These following 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 computed the effect of given options on
behalf of the power of the shareholders. These all factors are helpful for future forecasting and
decision making.

REFERENCES
Books and Journals
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and conventional finance during and post financial crisis. Qualitative Research in
Financial Markets.
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Emerald Group Publishing.
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developing countries: A Philippines case study. Energy Policy, 135, p.111008.
Chang, S. and Jo, H., 2019. Employee‐friendly practices, product market competition and firm
value. Journal of Business Finance & Accounting, 46(1-2), pp.200-224.
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Global.
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financial economic policy.
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Tongpoon-Patanasorn, A., 2018. Developing a frequent technical words list for finance: A
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business models?. Finance Research Letters, 39, p.101639.
Truby, J. and Ismailov, O., 2022. The role and potential of blockchain technology in Islamic
finance. European Business Law Review, 33(2).
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infrastructure: safeguarding public finance sustainability. In Social, Economic, and
Environmental Impacts Between Sustainable Financial Systems and Financial
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Zhou, K. and Li, Y., 2019. Carbon finance and carbon market in China: Progress and
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