Business Finance: Cash Conversion Cycle, Factoring Decision, Rights Issue, Dividend Growth Model, Dividend Payout

This study covers topics like Cash Conversion Cycle, Factoring Decision, Rights Issue, Dividend Growth Model, and Dividend Payout in Business Finance. It includes calculations, significance, benefits, drawbacks, and evaluations of each topic.

Business finance

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
Calculate the following:...............................................................................................................1
a) Calculating the Cash Conversion Cycle and write down its significance...............................1
b. State whether to accept the factoring decision and also state whether the amount saved can
be utilised.....................................................................................................................................2
QUESTION 3..................................................................................................................................3
(a) The theoretical ex-rights price per share................................................................................3
(b) The net cash raised.................................................................................................................3
(c) The value of the rights............................................................................................................3
d) The benefits and drawbacks of the right issue........................................................................4
QUESTION 5..................................................................................................................................4
a)..................................................................................................................................................4
b)..................................................................................................................................................5
c) Evaluate the disadvantages of utilising the dividend growth model to value stocks..............5
QUESTION 6..................................................................................................................................6
The size of the annual dividend to return to its shareholders for the factors which needs to be
considered....................................................................................................................................6
The realistic considerations which must be made while determining the amount of the
dividend payout...........................................................................................................................6
b) Make a calculation for each of the 3 alternatives....................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
The accompanying study compares the 2 initiatives using capital budgeting techniques like
NPV and IRR that would aid in selecting which investment is the better of the 2 (Asp and
Andersson, 2021). It also takes into account the factoring solutions that perhaps the company
could utilise to collect the money from its accounts receivables. It additionally advises businesses
on what adjustments would happen if the cost of capital rises by 20% in the following five years.
It estimates the updated cost and fair value of Plant plc in the last question. It further highlights
problems with the dividend growth paradigm.
QUESTION 1
Calculate the following:
a) Calculating the Cash Conversion Cycle and write down its significance.
Length of cash conversion cycle
- Current situation:
£000 £000
*Trade receivable 1,538
Trade Receivable under Factor
£12,000 x 40 days / 365 days = 1,315
Reduction in trade receivables 223
*Cost reduction of expenses
£223,000x8% = 1,7840
Cost of Trade Receivable
£1,315,000 x 8% = 105,200
Cost under the factor
£1,315,000 x 8% x 25% = 26,300
£1,315,000 x 10% x 75% = 98,625
124,925
Increase of the expenses Cost (19,725)
*Reduction of expenses cost due
The lower receivable 1, 7840

Reduction in bad debt
12,000 x 5% = 60,000
Saving in Administration Cost 160,000
237,840
Increasing in expenses cost due
To advance 19,725
Annual Fee of Factors
12,000 x 2% = 240,000
259,725
Net Cost (21,885)
Significance of the Cash Conversion Cycle: The Cash Conversion Cycle is being
employed to estimate the amount of duration it takes to recoup money from a company's
activities and working capital (Dube and Asthana, 2017). The less period a corporation spends
recovering money from borrowers and rotating the process, the better. The smaller the duration
span, the more earnings the business would generate. It additionally serves as a comparative of
its opponents' company operations in order to evaluate how long it will take to recover cash from
its businesses. Businesses could contrast and evaluate their performance in the market. The lower
the Cash Conversion Cycle, the better the link among vendors and the easier it is to track
company progress. The term "elevated conversion process" refers to the amount of duration it
takes to finish the cash conversion cycle, implying that perhaps the money would need more to
transform again to liquid currency.
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
As it could be observed from aforementioned, factoring assists the business in generating
more as comparing to the old approach that was previously being used by the business in terms

of intended to facilitate in retrieving the accounts receivables of the corporation and
thus business could employ factoring facilities. On an annual basis, the company would save
23263 by adopting factoring. The money gained through applying factoring in the firm would go
toward reducing the firm's overdraft charges, which are needed to supplement the firm's cash
flow. The money might be put to good use by the company in its commercial dealings (Esmaeili
and Golpayegani, 2021).
QUESTION 3
Calculate and explain the following:
(a) The theoretical ex-rights price per share
2 million ordinary shares issued to raise £1,000,000
Issue cost= £50,000
A Theoretical Ex-Right price per share = £2.64
Issue price at 20% discount
2.75 x 0.80 = £2.20 (Right issue price)
Ex-right price
(2.75 x 4 shares) + (2.20 x 1 new share) / 5 = £2.64
(b) The net cash raised
Net Cash raised = fund raised – issue cost
Net cash raised = £1,050,000
2 million ordinary shares = 500,000 new shares
500,000 new shares x 2.20 = £1,100,000
Net Cash raised = fund raised – issue cost
Net cash raised = £1,100,000 – £50,000 = £1,050,000
Net cash raised = £1,050,000
(c) The value of the rights.
Value of the right = T. ex-right price – right issue
Value of the right = 2.64 -2.20
Value of the right = £0.44

d) The benefits and drawbacks of the right issue
Current shareholders of the business are invited to participate in the rights issue and buy
extra shares. If there had been an opportunity to acquire more units at a cheaper cost than
competitors, existing shareholders will have a security cushion. Hanging Valley Plc requires
monetary assistance, therefore they give raw goods to allow companies to build up operations
and meet responsibilities effectively. Evaluating rights issues does have advantages and
drawbacks and thus they are explained below in detail:
Benefits:
 Raise promoters equity as perhaps the most strong statements would be that it encourages
business people to expand their ownership. Monetary supporters could seek the fund's
"limit investing part," thus bolstering existing positions (Kaindl, Hoch and Popp, 2017).
 The simplest way to increase investment is to issue equity, which has less regulations and
standards than community contributions because it is a more autonomous component.
Because the distribution of more shares, the fundamental approach for a suitable issuing
is for the authorized endeavour to file a deal statement to the Board of Control for these
assets and the operation phase for general review and authorization should be done before
it.
Drawbacks:
 Whenever an organisation offers a valuation proposal to generate funds, the participation
of present finance supporters might well be lowered, lowering the worth of every
component. Whenever new shareholders come in and reduce equity ownership, property
investment financing supporters have a difficult time.
 Increasing income to a certain level as an evident drawback would be that an organisation
could not obtain a specified quantity in an urgent initial public offer mindset. How much
money a group could generate with it is always not certain and thus add as a drawback to
this approach (Kaowiwattanakul, 2016)(Shishkov and Janssen, 2017).
QUESTION 5
a)
Shares’ Fair price
Dividends for the past 4 years = 13p, 14p, 17p and 18p

Rate Return = 14% = 0.14
Number of Years (n) = 4
Ordinary dividend per share = 20p
13p x (1 + = 20p
(1 + ) =
Growth = 1.1137 – 1
Growth = 0.1137
Growth = 11.37%
P = = 846.92p = £8.47
Fair price share is £8.47.
b)
Calculation of new price shares when the rate of returns changes to 15.4%
P =(20 (1+0.1137))/(0.154-0.1137) = 552.70p = £5.53
c) Evaluate the disadvantages of utilising the dividend growth model to value stocks
 When small capital shares are contrasted to large capital shares, local companies
outperform larger companies in the big scheme of things. Because many independent
businesses do not have that profit-driven attitude, such evaluation methodology could
not be utilised to estimate their worth (van Meerkerk, 2017). It should only be utilised for
highly successful companies. If monetary supporters concentrate solely on this strategy,
they might miss out on other chances to diversify their investments.
 The reality is that a group's revenues do not expand at a fixed value throughout presently
and in the future in the venture capital sector. In the big scheme of things, several
businesses have boosted their profitability and others might have to cut back on existing
earnings. A few even went so far as to cut the prices of the competitors that they lowered
their prices so that the competition can be increased and the other firm would have less of
the profits and more of the losses. Such actions are not included in the assessment

model's appraisal process. This implies that the approach is better placed for a variety of
businesses which consistently generate revenue increases year after year.
QUESTION 6
The size of the annual dividend to return to its shareholders for the factors which needs to be
considered
 Liquidity: Especially if the company requires deposits, the smaller profitability level is
preferred since the asset provides a means of financing and therefore does not require
exterior acquisition at a relatively constant level.
 Efficiency and growth: The smaller the payout, the greater the predicted growth and
efficiency, since finance traders would underestimate the group's return on capital,
increasing the theoretical worth along with the firm's valuation.
The realistic considerations which must be made while determining the amount of the dividend
payout
 Return payment deadlines as the corporation must determine if it has too many holdings
to pay returns. Accessibility is not the same as efficiency. As a result, the amount of the
payout is limited by the existing resources (Von Peinen, Böhmer and Lindemann, 2018).
 The income moving conditions laid forth in the Companies Act must be fulfilled prior
earnings can be declared. The amount is limited by the provisions of the corporate
legislation (Weller, 2019).
 Produce the desired marketplace expectations as if a company reports unusually large
earnings in a given period, the marketplace might anticipate the business to maintain pace
with the earnings. As a result, it's critical to overlook the dividend's amount (Yu, 2018).
b) Make a calculation for each of the 3 alternatives
Wealth of Shareholder = Market value of Shares held + Dividend received + Market value of
Shares newly allotted - Loss in value of shares due to dividend / scrip dividend
Because no worth is created in any of the three circumstances, the income of the
shareholders stays unchanged as the income that already exists.
= 432 * 1250 = 540,000

i) cash dividend payment A cash dividend payment of 15p per share = 15 * 1250 + (432
- 15) * 1250 = 18,750 + 521,250 = 540,000
(Cash per share * shares held) + (shares held * new market value per share)
ii) A 5% scrip dividend = 1250 * 105% * (540,000 / (1250 * 105%) = 540,000
(New total shares * new Market value per share)
iii) A repurchase of 15 % of ordinary share capital at the current market price = 187.5 *
432 + 1062.5 * 432 = 540,000
(Cash for 187.5 shares + Market value of remaining shares)
CONCLUSION
It could be concluded from the foregoing given study that it investigates which initiative
strategy will be more useful and appropriate for the Better plc organization. It will be beneficial
to analyze using methods like NPV and IRR. It also suggests that the company's cost of capital
will change by more than 20% in the next five years. In a subsequent phase, the cost of
each share, net income, and worth of rights issue of the hanging plc firm would've been
determined, together with the advantages and restrictions, to solve the appropriate issue.
Furthermore, this could establish the firm's fresh and reasonable value, as well as the issue that is
increasing owing to the dividend plus growth approach.

REFERENCES
Books and journals
Asp, L. and Andersson, J., 2021. Marketing Communication in the Context of Selling a
Business: Business Brokers and how They Communicate Value of a Business.
Dube, V.S. and Asthana, P.K., 2017. A comparative study on Financial Literacy of Uttar Pradesh
with Central Zone states in India. IOSR Journal of Business and Management (IOSR-
JBM), 19(10), pp.22-27.
Esmaeili, L. and Golpayegani, A.H., 2021. A novel method for discovering process based on the
network analysis approach in the context of social commerce systems. Journal of
theoretical and applied electronic commerce research, 16(2), pp.34-62.
Kaindl, H., Hoch, R. and Popp, R., 2017, May. Semantic task specification in business process
context. In 2017 11th International Conference on Research Challenges in Information
Science (RCIS) (pp. 286-291). IEEE.
Kaowiwattanakul, S., 2016. Role of International Study Experiences in the Personal and
Professional Development of University Lecturers in the Humanities and Social
Sciences Fields in Thailand. International Education Journal: Comparative
Perspectives, 15(2), pp.58-71.
Shishkov, B. and Janssen, M., 2017, May. Enforcing context-awareness and privacy-by-design in
the specification of information systems. In International Symposium on Business
Modeling and Software Design (pp. 87-111). Springer, Cham.
van Meerkerk, E., 2017. Teacher logbooks and professional development: A tool for assessing
transformative learning processes. International Journal of Qualitative Methods, 16(1),
p.1609406917735255.
Von Peinen, A., Böhmer, A.I. and Lindemann, U., 2018, June. System Dynamics as a Tool for
Data Driven Business Model Design in the Context of Autonomous Ride Hailing. In
2018 IEEE International Conference on Engineering, Technology and Innovation
(ICE/ITMC) (pp. 1-6). IEEE.
Weller, J., 2019. Critical reflection through personal pronoun analysis (critical analysis) to
identify and individualise teacher professional development. Teacher
Development, 23(1), pp.139-154.
Yu, W.M., 2018. Critical incidents as a reflective tool for professional development: An
experience with in-service teachers. Reflective Practice, 19(6), pp.763-776.