Business Finance: Capital Budgeting, Factoring, Rights Issue, and Dividend Growth Model

This project covers various topics in business finance such as capital budgeting methods, factoring services, rights issue, and dividend growth model. It includes calculations of Cash Conversion Cycle, NPV, IRR, theoretical ex-rights price, net cash raised, fair price of shares, and drawbacks of dividend growth model. The project provides insights into the significance of Cash Conversion Cycle, the advantages of factoring services, and the pros and cons of rights issue. It also advises on the selection of the best project based on NPV and IRR methods. The project concludes with the calculation of fair price and new price of shares using the dividend growth model.

Business Finance

Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1..................................................................................................................................3
Calculate the following:...............................................................................................................3
a) Calculating the Cash Conversion Cycle and write down its significance...............................3
b. State whether to accept the factoring decision and also state whether the amount saved can
be utilised.....................................................................................................................................4
QUESTION 2..................................................................................................................................5
a) Compute NPV and suggest which project should be accepted...............................................5
b) Calculate IRR and on the basis of this which project should be accepted..............................6
c) If the cost of capital increase to 20 % in year 5, then does the changes would be advisable..7
QUESTION 3..................................................................................................................................8
(a). the theoretical ex-rights price per share................................................................................8
(b). the net cash raised.................................................................................................................8
(c). the value of the rights............................................................................................................8
d) Pros and cons of right issue.....................................................................................................9
QUESTION 5..................................................................................................................................9
a)..................................................................................................................................................9
b)................................................................................................................................................10
c) Identify the drawbacks of using dividend growth model as part of valuing shares..............10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
In the following project it states about the two projects on the basis of capital budgeting
methods such as Net present value and internal rate of return which will help in determining the
best project among the two projects. It also considers the factoring services that can be used by
the organisation to recover the amount from its trade receivables. It also advices company as
what changes will occur if cost of capital will increase by 20% in the next 5 years. In last
question it calculates the new price and fair price of the Plant plc. It also identifies the issues
which are related to the dividend growth model (Alakaleek and Cooper, 2018).
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 Admin. 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 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 (Bessière, Stephany and
Wirtz, 2018).
QUESTION 2
a) Compute NPV and suggest which project should be accepted.
Period Project
A
Cash Flow
(£m)
Cost of Capital
12%
Present value
(£m)
0 -150 1 -150
1 40 0.893 35.72
2 50 0.797 39.85
3 60 0.712 42.72
4 60 0.636 38.16
5 80 0.567 45.36
NPV 51.81
Project B
Period Project
B
Cash Flow
(£m)
Cost of Capital
12%
Present value
(£m)
0 -152 1 -152
1 80 0.893 71.44
2 80 0.797 63.76
3 50 0.712 35.6

4 40 0.636 25.44
5 30 0.567 17.01
NPV 61.25
Net Present Value of project A is £ 51,810.
Net Present Value of Project B is £ 61,250.
Analysis: According to the calculations, both projects are advantageous and deliver good returns
on investment. When the NPV approach is applied to both projects, it is discovered that project
A is more sustainable than project B because it provides a higher return for a lower investment. It
will help in maximising the growth of the shareholder’s wealth.
b) Calculate IRR and on the basis of this which project should be accepted.
IRR = R1 + [NPV1/(NPV1-NPV2) x (R2-R1)]
It was used Cost of Capital of 31% to calculate NPV2.
Net Present Value of project A is a negative £22,630.
Net Present Value of Project B is negative £790.
Period For Project
A
Cash Flow
(£m)
Cost of Capital
31%
Present value
(£m)
0 -150 1 -150
1 40 0.763 30.52
2 50 0.583 29.15
3 60 0.444 26.64
4 60 0.339 20.34
5 80 0.259 20.72
NPV -22.63
Period For Project
A
Cash Flow
(£m)
Cost of Capital
31%
Present value
(£m)
0 -152 1 -152
1 80 0.763 61.04
2 80 0.583 46.64
3 50 0.444 22.2
4 40 0.339 13.56
5 30 0.259 7.77
NPV -0.79
- Internal Return Rate for Project A is 25.22%.
R1 = 12%
NPV1 = 51.81

R2 = 31%
NPV2 = (22.68)
IRR = 12 + [(51.81 / (51.81+22.63) x (31-12)]
IRR = 25.22%
Conclusion: Cost of Capital more than 25.22% will turn NPV negative and less than 25.22% will
show a NPV positive.
- Internal Return Rate for Project B is
R1 = 12%
NPV1 = 61.25
R2 = 31%
NPV2 = (0.79)
IRR = 12 + [(61.25 / (61.25+0.79) x (31-12)]
IRR = 30.76%
Conclusion: Cost of Capital more than 25.22% will turn NPV negative and less than 25.22% will
show a NPV positive.
c) If the cost of capital increase to 20 % in year 5, then does the changes would be advisable.
Period For Project
A
Cash Flow
(£m)
Cost of Capital
31%
Present value
(£m)
0 -150 1 -150
1 40 0.893 35.72
2 50 0.797 39.85
3 60 0.712 42.72
4 60 0.636 38.16
5 80 0.833 66.67
NPV 73.12
Period For Project
B
Cash Flow
(£m)
Cost of Capital
31%
Present value
(£m)
0 -152 1 -152
1 80 0.893 71.44
2 80 0.797 63.76
3 50 0.712 35.6
4 40 0.636 25.44

5 30 0.833 24.99
NPV 69.23
The cost of capital is increase to 20% in the 5th year, so from that it is advised to select
project A for the purpose of investment.
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) Pros and cons of right issue.
Existing investors of the company are welcome to purchase additional offers through the rights
issue. Current investors would have the safety net if there was an option to buy additional
apartments at a lower price than opponents. Hanging Valley Plc needs financial help, so they
provide basic stock to enable them to efficiently set up processes or fulfill obligations. There are
benefits and burdens of reviewing rights issues such as:
Advantages:
 The quickest strategy to improve capital is to issue equity: since it is a freer element than
public donations, there are fewer rules and guidelines for equity. The main strategy for a
proper issuance is that since the delivery of more units, the registered effort should
submit a transaction letter to SEBI and the transaction stage for public consideration and
approval.
 Increase promoter equity: One of the most powerful claims of traditionalism is that it
urges businessmen to increase their holdings. Financial backers can pursue the "stop
investment portion" of the stock, thereby supporting their holdings.
Cons:
 Raising revenue to a specific amount An undeniable disadvantage is that in an emergency
(IPO) mentality, an organization cannot get a specific amount. How much cash an
organization can raise
 The value of each unit may be diminished When an organization issues a value
proposition to raise capital, the stake of current financial backers may be reduced. Real
estate finance backers face a tough time when the entry of investors leads to a reduction
in stock holdings.
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 + Growth ¿ ¿4 = 20p
(1 + Growth) = 4
√20/13
Growth = 1.1137 – 1
Growth = 0.1137
Growth = 11.37%
P = 20(1+0.1137)
0.14−0.1137 = 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) Identify the drawbacks of using dividend growth model as part of valuing shares.
 The truth of the venture capital world is that an organization's profits don't grow at a
specific rate between now and eternity. Some organizations have increased their profits in
the long run. Others may reduce their profits. Some even decided to kill them outright.
These activities are not part of the valuation cycle of the valuation model. This means
that the model is best suited for several organizations that reliably provide profit growth
rates each year.
 While small-cap stocks are compared to large-cap stocks, it is smaller organizations that
perform better over the long term. Most private companies don't have this mindset to
deliver profits, which means this valuation model cannot be used to determine their
value. It has to be used for stocks that are really profitable. If financial backers focus only
on this particular model, they may pass up various opportunities to enhance their
portfolios.
CONCLUSION
It can be asserted from the above prepared report, it examines as which project plan would
be more beneficial and suitable for the organization named as Better plc. It would help to

evaluate with the help of calculations carried out such as net present value and internal rate of
return. Furthermore, it recommends the business to alter in cost of capital in upcoming 5 years
would be more than 20%. In another step, it would determine the price per share, net cash and
value of rights of the hanging plc company with the benefits and limitations so right problem.
Finally, it would determine the new and fair price of the planet plc company and would search
the issue which is rising due to dividend growth model.

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