Financial Management Assignment - (Question & Answer)

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FINANCIALMANAGEMENT
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1QUESTION 1...................................................................................................................................1(a) Calculation of fair price for Planet’s shares..........................................................................1(b) Calculation of new price for Planet’s shares.........................................................................2(c) Problems associated with dividend growth model as a way of valuing shares.....................3QUESTION 3...................................................................................................................................5(a) Recommendations related to the economic feasibility of acquiring the machine.................5(b) Benefits and limitations of various investment appraisal techniques....................................7CONCLUSION.............................................................................................................................10REFERENCES..............................................................................................................................11
INTRODUCTIONFinancial management is the process of planning, organizing, monitoring, directing andcontrolling the financial resources of an organization. It is concerned with arrangement andutilization of financial resources towards achievement of the organizational goals. The objectivesof financial management is profit maximization and wealth maximization of shareholders(Schlegel, Frank and Britzelmaier, 2016)..The purpose of this study is to make strategic business decisions with the help offinancial management. The study involves calculation of fair price of shares in differentsituations. Furthermore, it involves the study of various investment appraisal techniques forbusiness financial and investment decision making.QUESTION 1(a) Calculation of fair price for Planet’s sharesDividend growth model is defined as a valuation model of calculating the fair price ofshares or stock, by assuming that dividends grow either at a fixed rate or fluctuating rate during aperiod. This model is used to determine the intrinsic value or the fair price of shares which isbased on the dividend payout ratio of the firm (Afra, 2017). The model considers three keypoints that is expected dividend per share, growth rate of dividend and required rate of return.The fair price of a share can be calculated as :P = D / (k - g)where :P= fair value price of per shareD= expected / ordinary dividend per shareg= expected dividend growth rate per sharek= required rate of return per shareP = 20 / (1.38 - 0.14)Ordinary dividend per share20pRequired rate of return14.00%0.14Past 4 year's dividends13p14p17p18pPer year dividend growth1.38pFair value of shares16.13p
Fair price of share is calculated for the purpose of comparison between fair price andcurrent market value of share. Investors use this comparison for determining whether theparticular share is undervalued or overvalued. The investor's purpose behind this is to maximizetheir total returns. The model is a quick way to get generalized indications about the value ofprojected share prices (Schlegel, Frank and Britzelmaier, 2016)..In this problem, past 4 years dividends are provided which are 13p, 14p, 17p and 18p.The above table highlights the per year growth of dividend which is calculated as 18p / 13p thatis equal to 1.38p. Furthermore, the expected or ordinary dividend per share is 20p and therequired rate of return is 14%. The fair price of share is calculated by ordinary dividend per sharedivided by the difference ofrequired rate of return and the expected dividend growth rate pershare which gives a value of 16.13p per share. The result thus calculated is expressed as the fairprice of the share. It is the price which reflects the actual worth of a single share by consideringthe factors like the growth rate of dividend payout value to investors, the expected dividendvalue per share and the required rate of return (Alkaraan, 2016).The model indicates that if there is a rise in a dividend payout value, the fair price of theshare will decrease, thus decreasing the worth of the shares. If a company pays higher amount ofdividends its value of share will diminish over time. There is an inverse relationship betweendividend payout value and fair price if the share. A growth in the dividend payout ratio devaluesthe fair price of the share. The fair price of the share in the dividend growth model solelydepends upon the dividend policy of the company.(b) Calculation of new price for Planet’s sharesIn the present case Planet decides to incorporate more amount of debt in the organizationwhich will result in increasing the firm's financial risk and burden associated with its equityshares. As a result, the shareholders of Planet decide to increase their required rate of return to15.4%. The required rate of return is termed as the minimum amount of return an investor isready to accept for holding the stock of the company. A change in required rate of return willlead to the change of fair price of share.The new fair price of a share can be calculated as :P= D / (k- g)where :P= new fair value price of per share
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