Financial Management Assessment

This Financial Management Assessment explores the importance of financial management for companies and discusses long term finance and investment appraisal techniques. It includes calculations and evaluations of different options for issuing right shares and the benefits of scrip dividends for shareholders and companies. It also covers investment appraisal techniques such as payback period, accounting rate of return, net present value, and internal rate of return.

FINANCIAL
MANAGEMENT
ASSESSMENT

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
Question 2. Long term finance :..................................................................................................3
Question 3 Investment appraisal techniques:..............................................................................7
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................12

INTRODUCTION
The term financial management can be defined as a process of collecting, analysing and
interpreting financial data by help of vital range of techniques and methods (Knauer and
Wöhrmann, 2013). This is essential for companies to manage their financial resources so that
maximum utilisation can become possible. The aim of project report is to understand importance of
financial management for companies. The project report is based on two questions which are related
to equity financing and investment appraisal techniques in order to assess efficiency of project.
MAIN BODY
Question 2. Long term finance :
Issue of Right share- Right share issue can be identified as a method of inviting minority
shareholders to buy additional new stock in the business entities. This type of issue gives current
shareholders bonds which are known as a rights (Fan, 2015). Due to this issue of rights,
shareholders of companies become able to make purchase of new shares on discounted rate in
futuristic time period. Like in the Love-well limited company, they require financial assistance and
for this purpose they issued right shares. Herein, below some computation related to issue of right
shares has been done in such manner:
Shares which Lexbel Plc needs to issue = 180000 GBP
Market price of current ex-dividend of Lexbel Plc = 1.90GBP
3 assorted rights: issue prices recommended by corporation's finance director: GBP1.80, GBP 1.60
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)
Description Amount (in Amount (in Amount (in pound

pound except
shares)
pound except
shares) 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 (A/B) 100000 112500 128571.43
(ii) Theoretical ex price : In short form, this is known as TERP. It can be described as some type of
scenario where stock and right are added to stock. The value of the theoretical ex price is
determined by price of the stock of a corporation after the issuance of new right shares together
with the expectation that all new issued shares are taken into account by current stakeholders (Gurd
and Thomas, 2012). Ultimately, the goal of this kind of share is to generate additional capital by
granting them preference with current shareholders. Security rights offerings can be standard for
shareholders. This is because by the time of the right provided they will generate arbitration.
Particulars Condition one Condition two Condition third
Recommended right issue prices 1.8 GBP 1.6 GBP 1.4 GBP
Fund to be increased 180000 GBP 180000 GBP 180000 GBP
Number of shares required to issue 1 lac shares 1.125 lac shares
128571.43share
s
Pre right issue 1140000 1140000 1140000
Post right issue 1320000 1320000 1320000
Theoretical ex-right price 1.89 1.85 1.81
(iii) Anticipated earnings per share (EPS) = It is calculated from a formula that is mentioned
below in such manner:
Share before issue of rights x TERP/ Current market price.
In aspect of above given case, this can be find out that:
Recent market rate = 1.9
Number of shares available = 600000 shares
Return on shareholders’ fund = 140000 GBP

(iv) Form of issue of right issue price:
Particular Amount (in GBP)
Amount (in
GBP)
Amount (in
GBP)
Recommended right issue prices 1.8 1.6 1.4
Fund to be increase 180000 180000 180000
Number of shares to be issued: 100000 112500 128571.43
Exist number of shares 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
shares hold
Issue of 9 for
48 right shares
hold
Issue of 3 for
14 right shares
hold
Analysis: In accordance of above done calculations, herein below three options can be drawn that
are as follows:
 1st alternative is related to issue of rights @ rate of 1.8 will be 1 lac shares for each. Thus,
shareholders should allocate pro-rata one share to remained six shares.
 2nd alternative is regards to issue of rights @ rate of 1.6 will be 112500 shares for each.

Thus, shareholders should allocate pro-rata one share to remained 48 shares.
 3rd alternative is related to issue of rights @ rate of 1.7 will be 128571.43 shares for each.
Thus, shareholders should allocate pro-rata one share to remained 14 shares.
(v) Evaluation of best option among these above mentioned alternatives:
In conjunction with the three alternatives listed above, it can be found that the proposed
correct share value of 1.8 pound for each share will be advantageous with the above-mentioned
company. It's so because in this option the value of the projected earnings per share is higher as
opposed to the other two options.
(c) Evaluate the benefits of scrip divided in context of shareholders or companies:
Scrip dividend - This can be described as a form of dividend provided by businesses, rather than a
standard dividend. For all those corporations that issue lack of cash dividends, it is being efficient
(Jiang and Kim, 2013). Shareholders can receive scrip dividend as an option to currency dividend to
hold their dividend. This form of dividend is essentially ideal for both stakeholders and business.
That's because customers don't have to pay any transaction fees, commissions, etc. As for
enterprises, preserving cash dividend for the remainder of business transactions is simpler. It
consists below mentioned benefits and drawbacks which are as follows:
Benefits of scrip dividend for business entities-
 This is advantageous for businesses in order to retain a successful cash balance. It's because
they have the right to sell shares under this company instead of paying cash dividends.
 Therefore, the issuance of scrip dividends leads to an increase in the equity and gearing
conditions of entities. This is because issuing shares as a dividend as opposed to cash keeps
them in enhanced state of leverage.
 A business that has strong credibility and brand value will issue such shares when they don't
have sufficient cash to pay stakeholders.
 Furthermore, whether businesses pay a scrip dividend at a lower interest rate than their share
prices will not impact it. At the other side, this is not true in the situation of cash dividend
because if a company holds lower cash dividend then its share prices the decline.
 In addition, it is considered as one of the key source of finance except of cash dividend.
Advantages of scrip dividend for shareholders:
 The prime advantage of scrip dividend for stakeholders is that it helps them in making
savings of tax (Guess and Ma, 2015).
 It contributes effectively to shareholders who are needed to increase their ownership in any
company.
 This types of dividend is useful for shareholders in order to making saving of cost of
transactions.

 The scrip dividend helps to shareholders in the aspect of financial benefit due to time
interval of cash dividend.
 This dividend helpful for shareholders for increasing their equity without making any
additional charges such as commission, buying cost and many more.
Question 3 Investment appraisal techniques:
Overview of task- Under this task of project report, different types of calculations has been done
regards to investment appraisal techniques as well as project is evaluated in an effective manner by
help of methods. Herein, below some calculations are mentioned which are as follows:
(a) Calculation-
(I) Payback period method- Initial investment / cash flow (If cash flow will equal)
Initial investment = 275000 GBP
Cash flow = Expected annual cash inflow – cash outflow
= 85000 – 12500
= 72500 GBP
So, cash flow = 275000 / 72500
= 3.79 years
So cost of this project will be covered under 3 years and few months.
(ii) Accounting rate of return- Cash flow after depreciation / Initial investment x 100
Initial investment = 275000 pounds
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Cash In-flow 85000 85000 85000 85000 85000 85000
(-) Cash out-flow 12500 12500 12500 12500 12500 12500
Net Cash flow 72500 72500 72500 72500 72500 72500
(-) Depreciation (on the basis of
straight line method @ 15%) 38958.33 38958.33
38958.3
3
38958.3
3
38958.3
3
38958.
33
Net Cash flows after depreciation 33541.67 33541.67
33541.6
7
33541.6
7
33541.6
7
33541.
67
Initial investment 275000
Accounting rate of return
12.196970
9091
Working Notes:

Working Note:
Calculation of depreciation:
cost of machine 275000
scrap value 41250
Life of machine 38958.3333333333
Depreciation
(iii) Net present value = Discounted cash flow – Initial investment
Years
NPV= Discounted cash flow –
initial investment
Initial investment= 275000
Net Cash flow PV factor @ 12%
Discounted cash
flow
Year 1 72500 0.892 64670
Year 2 72500 0.797 57782
Year 3 72500 0.711 51547
Year 4 72500 0.635 46037
Year 5 72500 0.567 41107
Year 6 72500 0.506 36685
Scarp Value 41250 0.506 20872
Discounted Cash Flow 318700
Net Present value (NPV) = 318700 - 275000
= 43700 GBP
(iv) Internal Rate of Return (IRR) = LDR + PV of LDR – Initial investment / PV of HDR – PV of
LDR (HDR – LDR)
PV at 12%:
Years Cash flow PV at 12% Discounted cash flow

Year 1 72500 0.892 64670
Year 2 72500 0.797 57782
Year 3 72500 0.711 51547
Year 4 72500 0.635 46037
Year 5 72500 0.567 41107
Year 6 72500 0.506 36685
Scrap value 41250 0.506 20872
Total Present value @ 12% 318700
PV at 20%:
Years Cash inflow PV factor @ 20% Discounted value
1 72500 0.833 60392
2 72500 0.694 50315
3 72500 0.579 41977
4 72500 0.482 34945
5 72500 0.402 29145
6 72500 0.335 24287
Scrap value 41250 0.335 13818
Total Present value @ 20% 254880
Interval Rate of Return (IRR) = 12 + ( 318703 – 275000 ) / ( 254881 – 318703 ) * ( 20 – 12 )
= 12 + 43703 / -63881 * ( 8 )
= 12 + ( -0.68 ) * 8
= 12 – 5.44
= 6.56 %
Recommendation:
 Payback period- Based on the above described methodology, it can be ascertained that
project costs will be recovered within 3.79 years. It indicates that this project may be
advantageous for the above organization as it will recoup the cost of 275000 GBP in a
quicker time frame.
 Accounting rate of return- Within this approach the expected profit rate is calculated so that

project performance can be measured. Based on the volume of ARR estimated above, this
can be found that the output of the business would create profit from a rate of 12.19%. So it
will be advantageous for Love-well limited company to make investment in the business.
 Net present value- Love-well company's net present value for the project is 43700 pounds
that is greater. It indicates that they will benefit from the project if they take investments in
this venture because its present value is stronger
 Internal rate of return- The internal rate of return on the Love-well business project is
6.76%. This suggests that it will be good for them to make investment in this plan as project
provides greater return.
So above mentioned recommendation stats that above Love-well company should acquire
the project as all techniques are showing positive result.
b. Critical evaluation of investment appraisal techniques with the help of its benefits &
drawbacks
Payback period- It is a type of technique which is linked to process of computing estimated time
period that may occur in process of covering total investment amount (Shi, 2013). In the aspect of
above Love-well company, this technique has been applied in order to assess projected time period.
It has some limitations and benefits which are as follows:
Benefits-
 The major benefit of this technique is that it is very easier to use and simple to compute
estimated time frame for project's cost recovery (Dimitropoulos and Tsagkanos, 2012). It
needs some simple data to calculate payback period which are cash flow and value of
investment.
 Apart from it, this method is useful in the aspect of uncertainties because by help of it,
companies can evaluate project effectively.
Drawbacks-
 Under this method, time frame factor is ignored. Though, this factor is necessary to include
during analysis of efficiency of projects.
 Along with the ignorance of time factor, it does not consists all cash flows.
Accounting rate of return- This technique is often known as average rate of return. The average
rate of return on various projects is determined on which income can be produced (Gale and Ross,
2017). Such as in the project of the above client, this technique was implemented to evaluate project
performance. Herein, underneath some key benefits and drawbacks of this technique are mentioned
which are as follows:
Benefits-
 This is the fundamental thing that the firm's project team knows. It includes the total time-

saving with an operation total life. After tax and depreciation the ARR embraces the concept
of net income.
 The ARR strategy gives a good picture of the ventures' sales proportions for the company. It
also takes into consideration the concept of bookkeeping for assessing benefit at different
stages (Linnerooth-Bayer and Hochrainer-Stigler, 2015).
Drawbacks-
 This technique does not concentrate on the time value of money, but managers use it to
focus on various sources of financing with lower returns over a long period.
 As well as this technique is not suitable in the aspect of those projects under that
investments are made in accordance of partial base.
Net present value method- It can be defined as a type of technique in that current value of
different kinds of projects are evaluated. Under this technique, value of project is being determined
by making variation between discounted cash and initial investment (Aouni, Colapinto and La
Torre, 2014). Basically, net present value method is being applied in most of the companies as it
offers most appropriate results. Such as in the aspect of above Love-well plc this technique has been
applied in order to compute net present value of their project. Herein, underneath some key benefits
and drawbacks of this technique are mentioned which are as follows:
Benefits-
 The Net Present value equation covers any cash inflow at the investing period. This is
required for the money provider to bring all cash flow in to the account and to determine the
present value.
 Each structure takes into consideration the risk factor used for assessing the cash flow of the
various projects. This risk includes the likelihood of enterprises expenditures and initiatives
being introduced in different investment programmes.
Drawbacks-
 Under the NPV approach, it is difficult to evaluate the various projects in the same sector at
an economic cost to choose another program. The pace at which cash flows are to be cut is
complex for the executive team.
 Many times it is not simple for the shareholder to make a successful option as the returns on
investment are very good for the business. Primarily the NPV approach does not include
capital allocation so it is not that possible to choose the investment.
Internal rate of return method- This method of analysing efficiency of projects is one of the basic
method. Under it, rate of return is computed on which project will generate revenues (Albu and
Albu, 2012). In the aspect of above Love-well plc, this technique is being applied in order to
calculate rate of return of their project on which it produce return. Same as the above techniques, it

also has some benefits and drawbacks which are as follows:
Benefits-
 It consists the time value of money factor that is critical element in order to help assessing
beneficial alternative among various projects.
 As well as this technique does not consider rate of return aspect for evaluating the cash
inflows.
Drawbacks-
 This technique does not consider some major factors such as size of project, future cost and
many more.
 As well as this technique can not be applied on mutually exclusive projects (Zhu, 2012).
CONCLUSION
On the basis of above project report, it has been concluded that financial management is the
key of success of business entities. The report is divided into two parts in which first part concludes
about issue of right share concept and on the basis of it various calculations has been done. As well
as scrip dividend and its benefits for shareholder and company is mentioned under report. The
second part of report articulates about different types of investment appraisal techniques such as
IRR, NPV and many more. In accordance of applied techniques of investment appraisal this can be
concluded that above company should acquire project.

REFERENCES
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