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Financial Management Assignment (Solved)

   

Added on  2020-12-09

15 Pages3985 Words175 Views
Financial Management

Table of ContentsINTRODUCTION...........................................................................................................................1Question 2........................................................................................................................................1a. Calculation of the fair market value of planet shares..............................................................1b. Computation of the new fair value for planet shares..............................................................2c. Outlining the problems faced while using the dividend growth model in terms of valuingthe shares. ...................................................................................................................................2Question 3........................................................................................................................................42. Evaluating the advantages and disadvantages of different investment appraisal technique...9CONCLUSION..............................................................................................................................12REFERENCES..............................................................................................................................13

INTRODUCTIONFinancial management is the process of procurement of funds, allocation of funds andoptimum utilization of the funds so that larger profits can be generated from the particularproject. It facilitates the required financial information for assisting the company to produce anddistribute the products in such a manner that makes for higher profit margins. Financialmanagement provides for making different decisions such as financing, investment and dividenddecisions by the organization. The present report is based on the various financial aspectsinvolved in the financial management that includes the dividend policy and the investmentappraisal techniques. Furthermore, the study describes the capital budgeting tools that are usedfor planning the investment proposal and the evaluation of the rate of return. In the reportquestion 1 and 3 are been evaluated.Question 1a. Calculation of the fair market value of planet sharesCalculation of the fair price of planet shares last four years dividend per share to its shareholdersyearsamount (per share)growth rate 113N/A2147.69%31721.43%4185.88%Average growth rate11.67%Particulars formulaAmount($)Value of next year's expected dividend 20required rate of return14.00%constant growth rate11.67%fair market pricevalue of dividend expected for next year/(required rate of return – constant growth rate)858.3690987124Interpretation- From the above table, it is interpreted that the fair price for the shares ofthe Planet is evaluated as $858.36 by applying the dividend growth model. It is calculated by1

dividing the expected dividend that is announced by the company equates to 20 per share withthat of the required return that is 14% subtracting to average growth rate of the past four yearsresulted as 11.67%. In this model it has been assumed that the growth rate remains constant foreach of the years. The formula for computing the value is P= D1/(r-g).b. Computation of the new fair value for planet sharesCalculation of the fair price of planet shares last four years dividend per share to its shareholdersyearsamount (per share)growth rate 113N/A2147.69%31721.43%4185.88%11.67%Particulars formulaAmount($)Value of next year's expected dividend 20required rate of return15.40%constant growth rate11.67%New fair market priceValue of dividend expected for next year/(required rate of return – constant growth rate)536.1930294906Interpretation- From the above table it has been analyzed that as the planet decided toincrease the level of the debt which in turn increases the financial burden of the interest and therisk associated with the equity shares. The shareholders of the planet's requires the increased rateof return of 15.4%. Due to the increase in the required rate of return the new fair value of theshares has been ascertained as $536.19. c. Outlining the problems faced while using the dividend growth model in terms of valuing theshares. Dividend growth model is the model that computes the fair value of the stock with theassumption that the growth rate of the dividend is stable for perpetual years. This modeldetermines if the stock is undervalued and overvalued with the anticipation that the expecteddividends of the enterprise grows with a same rate which is deducted from the rate of return thatis required (Karadag, 2015). At the time of valuation of the shares many problems are faced2

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