Financial Management Assignment - Planet
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Added on 2020-12-09
Financial Management Assignment - Planet
Added on 2020-12-09
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FINANCIALMANAGEMENT
Table of ContentsINTRODUCTION...........................................................................................................................1QUESTION 1 – DIVIDEND POLICY............................................................................................1(a) Fair price of Planet's Shares for 2018:...................................................................................2(b) New Fair Price of Planet's Shares:.........................................................................................3(c) Problems in Implementation of Dividend Growth Model for Fair Valuation of Shares.......4QUESTION 3 - INVESTMENT APPRAISAL TECHNIQUES.....................................................41. Determination of feasibility of purchasing machine using various investment appraisaltechniques....................................................................................................................................5(a) Payback Period......................................................................................................................5(b) Accounting Rate of Return (ARR)........................................................................................5(c) Net Present Value (NPV).......................................................................................................7(d) Internal Rate of Return (IRR)................................................................................................72. Critical Evaluation of Appraisal Techniques .........................................................................9CONCLUSION .............................................................................................................................10REFERENCES..............................................................................................................................11
INTRODUCTIONFinancial Management is an integrated function of business management that isconcerned with planning, organizing, directing and controlling the monetary activities of anyorganisation. For any enterprise, it includes proper allocation of scarce resources in a wisemanner for carrying out production activities and other related operations (Alemis and Yap,2013). This report aims to discuss the concept of Dividend Policy and Investment Appraisaltechniques in detail. Such evaluation has been done by carefully analysing the case of Planet andLovewell Limited respectively. Also, the report outlines problems related to dividend growthmodel in valuing stock and evaluates the appraisal techniques like Accounting Rate of Return,Internal Rate of Return and Net Present Value.QUESTION 1 – DIVIDEND POLICYCalculation of Annual Growth Rate for Planet's DPSYearDividend Per Share (DPS in '£')Growth (in %)20140.1320150.147.69%20160.1721.43%20170.185.88%20180.211.11%The above table is representative of given information in a tabular format. It shows thedividend per share for Planet in different years in an ascending order. The current year's dividendper share is £0.20. In addition to this, year-on-year growth in dividend has been calculated inorder to ascertain steadiness in the company's policy for paying dividend to its shareholders(Filip and Raffournier, 2014). This growth has been calculated by employing the followingformula:Growth (%) = [(D1-D0) / D0]*100 where,D1 = Dividend for current yearD0 = Dividend for previous year After calculating the annual growth in dividend it can be observed that there is anunsteady growth prevalent in Planet. The company recorded a 21.43% growth in dividend in2016 paying dividend to its shareholders at £0.17 as compared to 2015 which was £0.14 for thesame. This indicates that Planet's dividend policy does not follow a strict pattern of paying1
dividend at a constant rate. The company tends to reward its investors with dividends withoutany criteria of making minimum dividend rewards every year. Even though the company isgiving dividends at unsteady growth rate, the annual dividends are higher than the previousshowing profitability in the operational activities carried out by Planet.Valuation of Stock such as Ordinary Shares of a company includes ascertaining the trueor intrinsic value of such stock class to ascertain the profitability and performance of thebusiness in the market. Intrinsic Value of a share is also known as 'Fair Price' (Finn, O’connelland Fitzpatrick, 2013). In the given context, the fair price of planet's shares has been calculatedbelow for 2018 at various rates of shareholder return. (a) Fair price of Planet's Shares for 2018:In relation to Planet's Dividend Policy, the company has recently announced an dividendper share of 20p or £0.20. Utilizing the information presented in the aforementioned table andsome additional data provided in this section, value of stock is ascertained on an annual basis.Hereafter, the fair price for Planet's shares has been ascertained using Dividend or Gordon'sGrowth Model. For calculation of fair price in this section the Rate of Shareholder's Return hasbeen taken at 14%. As per Gordon's Growth Model, a constant growth rate is expected in order to calculatethe intrinsic value of a given stock class (Habib Uddin Bhuiyan and Islam, 2013). It assumes aconstant growth in dividends perpetually as a company exists for an indefinite period of time.However, as the growth in Planet's case is unsteady, modifications have been made throughextrapolation. This means that the applicability of the method is extended to this situation byassuming that existing trends will prevail in Planet's scenario too. Under this model, value of stock is calculated using the following formula:Value of Stock = D1 / (k-g) where,D1 = Dividend for current yeark = rate of returng = annual growth rate The calculations have been provisioned below in order to estimate the share price:For 2015: 0.14 / (0.14-0.0769) = 0.14 / 0.0631 = £2.22For 2016: 0.17 / (0.14-0.2143) = 0.17 / (-0.0743) = £2.29For 2017: 0.18 / (0.14-0.0588) = 0.18 / 0.0812 = £2.222
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