Financial Management: Equity Finance, Investment Appraisal Techniques

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 2 Equity finance as long term finance..........................................................................3
Question 3 Investment Appraisal techniques...............................................................................8
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Financial Management can be defined as that manner through which the financial
activities and decision-making in a company is regulated. It also monitors the fund procurement
methods that are used by the company and the utilization of these funds in the operations of the
company (Richard, Kirby and Chadwick, 2018). In the present report, an analysis will be made
that whether the right issue is a correct equity raising option for the Lexbel Company and further
the concept of scrip dividend will be evaluated. Further, the current research will also evaluate
the different investment options that are available to the Love Well Company and advantages as
well as disadvantages that are associated with all the investment techniques will also be
ascertained in the report.
MAIN BODY
Question 2 Equity finance as long term finance
a) Determination of PAT
Right issue refers to raising additional capital for the company by issuing the right of subscribing
to these newly issued shared to existing shareholders only (Yu and et.al., 2015). Currently,
Lexbel Plc is planning to raise £180000 by the means of right issue shares so that current
operations can be expanded. The existing financial data can be listed as follows:
The market price of current ex-dividend of Lexbel Plc = £1.90
Three recommended right issue prices: £1.80, £1.60 or £1.40
Ordinary shares issued at 50p each = £300000
+ Reserves = £400000
Total = £700000
Amount to be raised is £180000
Therefore, Profit after tax (PAT) = £700000* 20%
= £140000
b) Determination of:
i. Number of right shares to be issued.
Nos. of shares required to be issued = Funds required to be raised/ Right issue price
Particular Amount (in terms of
£)
Amount (in terms
of £)
Amount (in terms
of £)

Existing number of shares 600000 600000 600000
Fund to be raised (a) 180000 180000 180000
Recommended prices of right
issue (b)
£1.8 £1.6 £1.4
Hence, number of right share to
be issued (c)= a/b
100000 112500 128571.43
ii. Theoretical ex-right issue Price.
The concept of Theoretical ex-Right Price can be defined as the estimated value or price of a
company's share after the right issue has been done. It can be determined by calculating the
weighted average stock price of each share for current and new shares. The shares issued at the
right price are marginally lower than compared to the existing market price of the shares and an
opportunity is presented before existing shareholders to invest more in the company at a reduced
price (Ogiela, 2018). When a new right issue is being brought, it automatically influences the
share price in the market because of the increase in the number of outstanding shares. The
theoretical ex-right price is usually computed instantly after the first day of right issue shares
offering.
It can be clearly interpreted from above that the theoretical ex-right price is lower when
the recommended right issue price is lower.
iii. Expected earnings per share.
Expected Earnings per Share (EPS)= (Shares before the right issue * Theoretical ex-right issue
price) / Current Market Price