Financial Management: Right Shares, Capital Budgeting Techniques, Scrip Dividends

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
QUESTION 2...................................................................................................................................1
a) Issue of right shares.................................................................................................................1
b) Computations...........................................................................................................................2
c) Shareholders opting for scrip dividends rather than cash dividends. .....................................4
QUESTION 3 ..................................................................................................................................5
a) Identifying feasibility of project by using techniques of capital budgeting............................5
b) Advantages and disadvantages of investment appraisal techniques......................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial management is amongst the important sector to be considered by the business.
Excellent knowledge of financial management is required for running the business successfully.
Financial management deals with strategic planning, to organise, direct and control the financial
undertakings of organisations. It involves application of management principles in the business.
It enables the company to have adequate and regular supply of the funds. It ensure that the
adequate returns are generated to the shareholders that depends upon the earning capacity of the
business. Financial management deal with effective utilisation of funds within the company. It
ensures safety of the enterprise over the investments options it is planning to adopt for the
business. Study is focused over the ways of raising funds by the management with least costs.
Also the tools & techniques used in investment appraisals have been demonstrated in the report.
Question number 2 & 3 have been answered in this report that are related to right issue and
capital budgeting techniques.
QUESTION 2
a) Issue of right shares
Right issue- It means the way through which company could raise capital by issuing the
share to an existing shares at lower price rather than going for issuing of new shares. Right offer
or right issue is form of dividend giving subscription rights for buying the additional securities in
company given to the existing shareholders (Pathak and Gupta, 2018).
Lexbel company decided to raise the funds for issuing the right shares for the purpose of creating
expansion in an existing operations. The financial data are as follows-
Particulars Amount (£) Amount (£) Amount (£)
Expected amount to be
raised 180000
Market value of the
current ex dividend 1.9
Recommended price for
right issue 1.8 1.6 1.4
Ordinary shares @ 50 pence each 300000
1

Add: Reserves 400000
Total 700000
Profit After tax 700000*20%
PAT 140000
b) Computations
i. Number of the shares that are required to be issued= Fund need to be raised/ price of
right issue
Particular Amount (in £) Amount (in £) Amount (in £)
Number of shares already existed 600000 600000 600000
Fund needed to be increased (1) 180000 180000 180000
Recommended price for right
issue (2)
£1.8 £1.6 £1.4
No. of shares needed to be issued
(3)= 1/2
100000 112500 128571.43
(ii). Calculation of theoretical ex-right price
Theoretical ex-right price – It could be defined as the estimated share price of company after
company has brought the right issue. The theoretical prices represents the market price of share
on theoretical basis. Prices of theoretical ex rights are less than the market prices of the shares.
They are calculated on weighted average basis. Rights offering are made at first to the existing
security holders of company.
Particulars Scenario 1 Scenario 2 Scenario 3
Recommended right
issue price 1.8 1.6 1.4
Funds need to raised 180000 180000 180000
No. of the shares
required to issue 100000 112500 128571.43
Pre right shares issue 1140000 1140000 1140000
2