Financial Management: Valuation Methods and Investment Appraisal Techniques

Financial Management

Contents
INTRODUCTION...........................................................................................................................3
QUESTIONS...................................................................................................................................3
Question 2 (Mergers and Takeovers).....................................................................................3
Question 3: Investment appraisal techniques.........................................................................7
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial management can usually be interpreted as a type of operation related to a firm’s
financial dimension being effectively controlled (Chandra, 2020). Numerous types of operations
are handled within financial control like productivity, revenue, expense and review of decision
making on unproductive operation. This really is the financial managers' responsibility to make
good use of entire financial capital accessible by making sufficient allocations that help to reach
the results. In present time, company focuses to have effective financial management so that
losses can be removed and business operation can be expanded.
The goal of this project is to understand various types of financial terminology and
concepts such as business valuation for sale, project review under methodology of investment
evaluation. The study includes two issues focused on theoretical and realistic implementation of
merger & acquisition and also various approaches for evaluating investment.
QUESTIONS
There are 3 sections in the design proposal and only 2 are picked out of these questions
(numbered two and three). Underneath, these problems were answered in depth in such ways as:
Question 2 (Mergers and Takeovers)
Overview: This reasoning is based on financial analysis of respective company with
acquisition goal. According to the details provided, Aztec plc will assume over Trojan plc with
in forthcoming span of time. Comprehensive explanation of Trojan plc was already performed
for this reason such that Aztec plc general manager can decide to either buy this business or not.
(a). Price earnings ratio- Share price / Earnings per share
In try to determine out the significance of the proportion of stock profits, data regarding
stock market as well as EPS should be available. According to the summary, following data is
available, for example:
Price of each share £2.05
Number of share outstanding 147 Million
Net income £40.4 Million
Calculation of EPS:
EPS = Net income / Number of share outstanding
= £40.4 Million / 147 Million

= £0.27
Valuation from both EPS and shares cost has been derived according to the above
section, hence the stock earnings ratio would be as follows:
Price earnings ratio= £2.05 / £0.27
= 7.59
Description: According to the price earnings ratio estimated above, Trojan plc can be seen to
produce suitable earnings through every share. The profits on each stock are roughly 0.27 pounds
whereas the worth of every other share is 2.05 pounds. Thus, it seems appropriate to buy Trojan
plc from Aztec plc at such a stock earnings ratio of 7.59.
(b) Dividend valuation model:
Under this process, appraisal is performed during the financial year in conjunction with
paying dividend. To implement this pattern there is an equation which is as follows:
D1 / (1 + k) + D2 / (1 + k) 2 + D3 / (1 + k) 3 + D4 / (1 + k) 4.............
This formula reads:
D1 corresponds to the dividend number earned in 1st year.
D2 applies to dividend number earned in the 2nd year.
D3 applies to dividend number earned in 3rd year.
D4 applies to dividend sums earned in 4th year.
K refers to the expected rate of return
Given data:
Amount of dividend paid in 1st year (D1) 10p
Amount of dividend paid in 2nd year (D2) 10.5p
Amount of dividend paid in 3rd year (D3) 11p
Amount of dividend paid in 4th year (D4) 12p
Predicted rate of return (K) 11%
Putting values in formula:
= 10p (1 + 11%) + 10.5p (1 + 11%)2 + 11p (1 + 11%)3 + 12p (1 + 11%)4
= 10 p (0.11) + 10.5p (0.11)2 + 11p (0.11)3 + 12p (0.11)4
= 11.1 + 10.5 (0.0121) + 11 (0.001331) + 12 (0.000146)
= 11.1 + 0.127 + 0.014 + 0.00175
= £11.24