Financial Management: Long Term Finance and Investment Appraisal Techniques

This document discusses the concepts of long term finance and investment appraisal techniques in financial management. It covers topics such as equity finance, rights issue, scrip dividend, payback period, net present value, accounting rate of return, and internal rate of return. The benefits of scrip dividend and the evaluation of different options for right shares are also discussed. The document provides insights into selecting the right project for business growth and development.

Financial Management

Contents
INTRODUCTION.......................................................................................................................................3
QUESTION 2..............................................................................................................................................3
(a) Long term finance: Equity finance.....................................................................................................3
(c) Evaluate the benefits of scrip divided in context of shareholders or companies.................................8
QUESTION 3..............................................................................................................................................9
(a) Investment Appraisal techniques........................................................................................................9
b. Limitations and benefits of different investment appraisal techniques..............................................15
CONCLUSION.........................................................................................................................................16
REFERENCES..........................................................................................................................................18

INTRODUCTION
Financial control is described as having dealt with others and assessing funds and
financial assets to support improve business processes for an individual or an industry. Such as
financial management is the work performed for a firm by a financing division. Financial
management is an important part of management at large. It concerns the roles of the economic
people in the organization. Solomon has described the word cash activities, "It concerns the
productive use of such a big financial asset, including investment resources." It is that
subdivision of business management that has matured to provide enough industry with the whole
of specialized and reliable investment banking; encompassing, in specific, the introductory and
advanced of the required financial affairs and making sure their greatest proper implementation-
contributing to some of the most efficient and appropriate achievement of the common corporate
strategic goals. This report based on the various questions that base on the long term finance as
well as on investment appraisal techniques. With the use of these techniques select right project
to enhance the business growth and development.
QUESTION 2
(a) Long term finance: Equity finance.
(A) Issue of Right share: The issue of rights creates value privileges to the existing
corporation's investors, enabling them to acquire additional financial instruments contact the
company at a reduced price rather than buying crucial market dominance. The total amount of
additional financial products to be acquired is based on proven investments of the bondholders.
Rights issue provides sensitive materials to modern investors and they have the lawful authority
as the correct (not really the deemed sufficient) to invest directly at a lower cost prior to actually
or on a particular date. In this Lexbel plc intends to issue right shares and that of other current
shareholders with both the purpose of ensuring their financial obligations. Companies most
frequently concern a proposal of rights to start raising extra capital. For an organizations to
decide its existing debt responsibilities, that may need additional cash. Disturbed companies
generally use rights issues to pay off loans, particularly when they can't collect more funds. Not
all firms pursuing rights products and services are in financial difficulty, though. Even firms with

spotless financial statements can exploit rights issues. Depending on the current income and
capital framework, the foregoing are equations to determine the amount of correct shares that the
corporation will submit as continues to follow:
Lexbel plc wishes to rise: 180000GBP
Current ex-dividend market-price of Lexbel plc: 1.90GBP
3 assorted rights-issue prices recommended by corporation's finance director: GBP1.80,
GBP1.60 and GBP1.40
Right issue of Lexbel plc
Aggregate (no.)Ordinary shares ( @ 50 for
each) 300000 Pounds
Add: Aggregate Reserve 400000 Pounds
Whole Sum 700000 Pounds
Profit Post taxation ( 700000 pounds x 20
percent) 140000 Pounds
(I) Number of shares to be issued = (Aggregate Funds to be elevated / right issue prices)
Descriptions
Amount (in
pound except
shares)
Amount (in
pound except
shares)
Amount (in pound
except shares)
Exist number of share 600000 600000 600000

Fund to be raised (A) 180000 180000 180000
Suggested right issue prices (B) 1.8 1.6 1.4
Number of shares to be issued: 1/2 100000 112500 128571.428571429
(ii) Theoretical ex price: Theoretical ex-rights result of the increase the asset value of financial
instruments supplied by special rights offerings. Selling privileges are generally only responsive
to current investors and only usable for a brief span of time (approximately 30 days). Commonly,
protections services compare investors the option of having to buy a reasonable and fair amount
of stocks at reduced price, pre - determined market value. The aspect to be purchased by another
listed company focuses on the investors' established prizes in the corporation. The purpose is to
build additional capital, with attention paid to adequate financing.
Security rights offerings could be a regular phenomenon for investment firms which
include investment firms, as they can identify greater premises for dispute resolution via the
moment of rights being provided. Given that it needs to set a constitutional basis over the current
valuation, rights providing length will normally hinder regulated economy trying to deal further.
A theoretical ex-rights price (TERP) is the market price which a stock theoretically will have
after a latest release of rights. Businesses can use the entry of new privileges to financial analyst
more stocks, generally at a huge discount. Special status repayment affects stock prices, since it
continues to increase the number of shares.
Particulars Condition (i) Condition (ii) Condition (iii)
Recommended right issue prices 1.8 pound 1.6 pound 1.4 pound
Fund to be raised 180000 pounds
180000
pounds
180000
pounds
Number of shares needed to issue 1 lac shares 1.125 lac 128571.43shar

shares es
Pre right issue 1140000 1140000 1140000
Post right issue 1320000 1320000 1320000
Theoretical ex-right price 1.89 1.85 1.81
(iii)
Anticipated earning per share (EPS) = (Shares before right issue x theoretical ex- right price) /
Current market price, so here in given case Market rate is 1.9 and Available(no.) of shares are
600000shares while Return on shareholder fund is 140000pounds
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 128571.43
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 each share 95238.1 97297.3 99447.51
Bonus fraction 50390.53 52593.14 54943.38

Expected earning per share (EPS) 596842 584211 571579
(iv) Form of issue of right issue price:
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 to be issued: 100000 112500 128571.43
Exist number of share 600000 600000 600000
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
share hold
Issue of 9 for
48 right share
hold
Issue of 3 for
14 right share
hold
Critical evaluation:
From the analysis of all the above list it has been analyzed that in the sense of Problem of
right shares with available methods there have been corresponding three circumstances, as can be
seen elsewhere here:
• No. of functionally enhanced shares at an intermediate rate of 1.80 in the correct issue shall be
1 lac-share of each share. Accordingly, owners will allocate the pro-rata 1 share to the
spearing six.
• In the second scenario with a substitute of 1.6 pounds per share, 112500 must be issued, so that
here 9 shareholders will be made available toward 48 appropriate share capitals on the basis of a
pro-rata basis.

• At the time in a third scenario of 1.4 pound instead every share no. of the shares to be obtained
is 128571.43 predicated on over contribution Issue 3, it is provided to institutional investors
toward 14 right shares.
(v) Evaluate the best option from three right issues:
Analyzing the type of all the above three choices, it was analyzed that the recommended
right stock price of 1.8 pound with each equity would be far more beneficial compared with the
corresponding corporate entity because the forecasted earnings per share (EPS) in just such a
case is higher than other 2 alternate solution possible extensions.
(c) Evaluate the benefits of scrip divided in context of shareholders or companies
Scrip dividend: Scrip dividend described as existing shares for a shareholders authorized
company instead of a regular dividends. As a corporation that offers a lot of little cash available
to offer regular dividend, a scrip dividend might have been used, but they would still have to pay
their investors. Also, stockholders could be provided scrip dividend payments as just an
alternative for financial dividend income to progressively execute their dividend payments into
more and more shareholdings. The drawback for creditors is that investors will not have to pay
any investment expenses, including tax, if they buy new shares. It's also a major way to earn time
by not agreeing to spend for equity holder money dividend payouts. Scrip dividends attributed to
ordinary shares assist the delivering institution in maintaining and encouraging stock holders to
increase their interest in the business. It not only lowers the cost of buying restricted stock but
also could deliver the stockholders a tax credit. For example, the investor recognizes capital gain,
instead of profits. The tax benefit is taxable at a lower rate than normal distributions. The
organization is using this tactic because it needs to shell out its inventors because they may not
have enough money for it. It market system to fresh and dried shares as contrasted with equity
shares. In many circumstances, it will be seen as a mortgage segment that has these benefits and
also drawbacks from both the firm and the shareholders. Extra evaluation addressed elsewhere
here:
Benefits of Scrip dividend:
In context of company:

• This assistance in sustaining the extra money-funds stance of the private company, like here in
the whole type of earnings primarily stockholders just go for the alternative of shareholdings.
Because of the financial resources from this corporation, and also enhance in dividends.
• The financing and lending strategy of the business may lead to better productivity of the
transfer of bonds through scrip income approach, leading to an increase in the total borrowing
ability of the business.
• A firm with greater brand value and a large market share will offer this form of dividends
although with restricted financial resources if the organization guarantees that the majority of the
dividends go with an equivalent portion.
• A further main benefit here is that tinier scrip dividend repayment normally does not
significantly reduce the company's market value. While where the business does not take
payment as an alternative, conceptual premises suggest a fall in the value of the shares.
• It is also an important source of financing and financing owing to the alternative of earnings
shareholdings.
In context of shareholders:
• The major benefit of a scrip dividend for investors is that they might benefit from tax benefits
by following the stock choice / substitute.
• Shareholders may plan to raise the share of the company can benefit from this dividend,
because they can raise their equity stake with little increased management fees.
• Stock options in scrip dividends will have increasing economic rewards compared to dividend
payments, so stakeholders often choose to collect scrip dividend payments.
QUESTION 3
(a) Investment Appraisal techniques
When an organisation wants to invest amount in project that time use these techniques
and analyze returns from the techniques. After assessment get effective results that supports to

business to select right project from the different projects. There are discussed various
investment appraisal techniques in context of Lovewell Limited such as:
Payback period: It is one of the easiest capital budgeting techniques which can take
place to protect operating costs in calculating time frame. In this methodology if the measured
payback strike price is less than is ranked higher. It is calculated by various methods according
to the cash flows. This technology has been developed in the Love-well element of an above to
compute the payback period of everyone’s equipment.
Net Present value: Within this current price of a specific task has been computed this
can be characterized as a type of technique. Reduced price element is also regarded in this
technique, so that optimum values can be evaluated for any financial project. Underneath it, the
project is acceptable by the corporation if the valuation of every task shows positive results.
They apply this information in the Love-well case of a corporation above to evaluate their
implementation success.

Net Present value (NPV) = 318700 - 275000
= 43700
Accounting rate of return: It is a kind of methodology where overall operating earnings
are calculated as a rate for any specific project. If the rate of return for any task is greater then
businesses should recognize that. Within this method actual profit significance is being used to
evaluate the return on investment on accounting. This method has been applied in Love-well
limited members to identify the productivity of their task

Working notes
Internal rate of return: This strategy is one of the useful method of financial analysis
that businesses use to evaluate venture if this is advantageous or not. It is generally based on the
reduced price time span which analyzes task NPV and then characterizes working capital. They

have performed the analysis in the above-mentioned Love-well limited organization with the aim
of enhancing the strength of their task.
Internal Rate of Return (IRR) = LDR + PV of LDR – Initial investment / PV of HDR – PV of
LDR (HDR – LDR)
= 12 + (318703 – 275000) / (254881 – 318703) * (20 – 12)
= 12 + 43703 / -63881 * (8)
= 12 + ( -0.68) * 8
= 12 – 5.44
= 6.56 %
Working Note:

Recommendation
• Payback period - based on the computed payback period worth, it may be suggested that
Love-well type of money the computer. It is so because an approximate 3.79 year time span is
acceptable.
• Return accounting rate - The estimated ARR value is 12.20 per cent higher and adequate to
benefit from investment costs. So organization Love-well will purchase the latest equipment.
• Net present value - If NPV indicates particular benefit for any venture then businesses will
purchase the venture. As regards the above firm, the net present price of the contract equipment
is 43700 pounds. Then they will buy the machinery.
• Internal Return Rate - The venture IRR of the above business is 6.56 per cent, which is
adequate for them all to regain capital investment. Therefore they should start buying machine
tools.
Based on the above review, Love-well business should suggest it all to go with new
equipment, because it will be good for them.

b. Limitations and benefits of different investment appraisal techniques
Payback period
Limitations: If a task requires this form of expenditure it places a huge amount of weight on the
short-term cash stream. This also complete integration with entire assessment toward these trying
to capitalize mostly on short-term gains. In some cases, however, looking at the lengthy-term
working capital may be cleverer. This approach can, sadly, confuse or distort long-term
evaluations and can thus render certain extremely labor intensive more feasible than they
actually are.
Benefits: Often as a business manager, choosing among several forthcoming ventures or
acquisitions sometimes seems incredibly difficult. There could be problems where even the
range and capacity of ventures seem so identical that it would be hard to determine without any
solid statistics to back it up. The payback period must be able to present specifically increasing
commitment would be good based on ROI that will encourage the judgment. When there isn't
anything else to distinguish between different tasks, a director would get all the details and
support he / she can make that decision.
Net Present value:
Limitations: Not the only figures used in determining a Net Present Value are revenue inflows
and outflows. While they are the major elements of the calculation, the price of incentive should
always be calculated. This estimate is characterized as an expenditure which happens by not
adopting solutions which could have provides a strong revenue increase. Many companies would
not even attempt to measure those expenditures. If the options are motivating to measure,
otherwise the NPV outcomes might not have had the degree of certainty or truthfulness
preferred.
Benefits: It makes complete sense for shareholders to use Net Present Value, since it does not
make the assumption that investment returns will simply place the Internal Rate of Return
( IRR). IRR is the interest rate at which the NPV of all cash flows 0, both positively and
negatively. Investing money the working capital in IRR will indicate that a company reinvests
the working capital in its venture into the economy at the same rate as that of the return on

investment on its initiative. In this situation, it would be best if an authorities find some venture
which yields the same rewards than the venture for the new investment attempt.
Accounting rate of return
Limitation: It is known that the technique does not carefully consider the environmental forces
which hamper a development's profit-earning efficiency. When the ROI (rate of return) and the
ARR (required rate of return) are measured independently, individuals will take place at different
outcomes. The technique comes at the expense of the expected revenue and is only involved in
profit maximization.
Benefits: The approach provides a definition of net profits, that is, the profits after income taxes
and deterioration. Understands the needs of proprietors: The investors are far more concerned in
the return to shareholders. Thus, the model enables fulfill the curiosity of the holder about their
rates of return.
Internal rate of return
Limitation: The cost of capital is not expected to be a part of the picture while using the IRR
equation. Often related to that as the "hurdle rate," the estimate is the rate of interest expected to
finance projects. Even though it can be an additional benefit since the cost of capital is perhaps a
qualitative character, occasionally it can also be a declared character. The IRR may not have an
exact estimated amount within this case.
Benefits: IRR is quantified when users compute the interest rate where even the total value of
expected cash flows is equal to the investment requirements. That indicates that certain cash
inflows will be deemed as part of the assessment process for the IRR. This enables the assigning
of an equal power to each and every cash flow while judging by the amount of capital from a
technology standpoint.
CONCLUSION
This can be concluded from the results from the above research proposal that financial
management has a vitally broad presence. Along with it made up of different types of
methodologies which can be implemented according to the nature of the company operations.

The project estimate is focused on two activities where the first choice is to fund capital, which
suggests that owners will go for the initial choice because it will help them. Although the second
task is all about methodology of investment in which evaluation all methods are applied to
compute the productivity of a specific project. It can be reached the conclusion in extensive
assessment of all methodologies that Love-well plc must obtain the equipment.

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