Financial Management: Calculation of Market Value and Book Value, Cost of Capital, Investment Appraisal Methods, and Connection between IRR and WACC

This report covers financial management techniques such as calculating market value and book value, cost of capital, investment appraisal methods, and the connection between IRR and WACC. It includes a critical analysis of the firm's capability to reduce the weighted average cost of capital.

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
a) Calculate the market value and book value. Compute cost of capital................................3
b) Recomputed cost of capital of organisation which would reflect changes........................6
c) Critically examine that weather it is sympathize that the firms would be capable to reduce
the weighted average cost of capital.......................................................................................8
d) Critically analyse the connection between the Internal rate of return IRR and weighted
average cost of capital WACC on the purpose of investment................................................8
2. Investment appraisal method............................................................................................10
a. Compute the investment appraisal method and suggest the economic viability of the
assessment............................................................................................................................10
b. Critically measure the strategy of financial director of PM limited.................................13
c. Describe the advantages and limitations of investment appraisal methods......................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial Management is a business function that deals with managing the funds available in
the business organisation. The proper utilisation of finances leads to success of the business
which is calculated by determining the return on investment of the business concern. In the
following report it states about the financial management which is used as a technique of
utilising the funds on project which yields maximum profits. It provides organised approach
towards dealing with the available data. It is process of classification, preparation, controlling
and providing guidance. It also uses and provides a coordinated approach that will help to
accomplish functional work in a fair, equitable, skilled and workable manner. The report further
covers different inquiry arrangements, which will help monitor the reserves collected so far.
Organizations selected to implement specific equipment and procedures that Trust plc is adapting
and using to examine the value of elements. The models in use can be understood as, for
example, price-to-profit ratio techniques, profit development models, and limited-revenue
strategies. The report further aids in generating ideas and recommendations that will aid in
understanding which model is ultimately best for different accessible models (Hao, Prevost and
Wongchoti, 2018).
TASK
a) Calculate the market value and book value. Compute cost of capital.
It reflects the amount of cash that an association invests resources into to find improved
results with the help of specific equipment, known as the cost of capital. For example: If an
individual spends a specific amount of cash to build another machine in his separate business to
achieve the goals and objectives set in the organization, that cost will be remembered because
hardware should be capital, not conducive to needing some return to Supported use of the
business.
WACC describes typical capital expenditures for setting up a large business that will be
paid to its partners or investors. Typically, weighted typical capital expenditures may be assets to
invest in associations that need to expand and grow in the organization, if required by the
organization. It further emphasizes the provision of common stock or securities to individuals so
that they can buy and subsidize businesses. For example: if an association asks for support, then
they should publicly offer specific shares and the organization will then make substantial normal

capital expenditures and provide some normal returns to the association's associated financial
backers (Idward, Majid and Mediyati, 2018).
Variant of this approach in context of equity has been discussed earlier in the chapter of
Security Valuation. Simply speaking, if the present value arrived post application of the discount
rate is more than the current cost of investment, the valuation of the enterprise is attractive to
both stakeholders as well as externally interested parties (like stock analysts).
Market value of WACC: If an organisation computes its expected cost of capital then the
weighted average cost of capital would be formulating with the help of market value of different
elements which are not in their book value. Market value can be explained as a rate at which an
asset can be exported and implemented on basis such as who bids the highest auction amount
among different competitors available. Market value can also be referred as market price. Market
value also require the section of special figure, it then further states that they are accessible
among two associates in which they would be able to create fair value of higher transactions.
Book value of WACC: It reflects the amount of cash that an association invests in a
specific resource to learn to improve outcomes with the help of specific equipment and is known
as the cost of capital. For example: If an individual spends a certain portion of cash on building
another machine in his separate business to achieve goals and objectives set in the organization,
that cost will be remembered as hardware should be capital and against needing some return to
The business of legalizing consumption.
In this method the value of business is calculated by capitalization of company’s
expected annual maintainable profit using appropriate required rate of return or yield or
discounting rate. Annual expected maintainable profit can be calculated using weighted average
of previous years’ profits after adjusting synergy benefits or economy of scales in the same profit
(Kazakova and Sivkova, 2019).
Though the main advantage of using this method is that it is forward looking approach
however the disadvantages are estimation of expected future profit and difference in treatment of
extra ordinary and exceptional items.
The DCF is indeed a revolutionary model for valuation as FCFs truly represent the
intrinsic value of an entity. However, the whole calculation gravitates heavily on the WACC and
the TV. In fact, in many cases the TV is found to be a significant portion in final value arrived by

DCF. This means that the growth rate and underlying assumptions need to be thoroughly
validated to deny any room for margin of error of judgment.
Computation of value weighted average cost of capital:
In relation to calculate the WACC the states figure must be addressed:
Particular Amount Weights Cost of
Capital
WACC
Equity Share
capital
30000 .50 24 % 12 %
Preference
Share Capital
10000 .17 7 % 1.19 %
Reserves and
surplus
5000 .08 24 % 1.92 %
Bonds 15000 .25 10 % 2.50 %
Total 60000 1.00
WACC 17.61%
Working notes:
The cost of bonds: 105
The cost of preference shares: 7%
The cost of equity is equivalent to cost of equity
The cost of equity will be computed as under:
It will be computed with the help of Gordon growth model formula:
Ke = D1 / P0 + G
Here the growth rate can be calculated:
Growth rate
= (.31 / .23) .20
= .42 or 42 %
Therefore, expected divided can be said as
D1
= D0 + Growth Rate
= .31 + 42 %

= .44 p
Cost of Equity will be: -
= .44 / 2.56 + 42 %
= 24 %
Computation of market value weighted average cost of capital.
Particular Amount Weights Cost of
Capital
WACC
Equity Share
capital
76800 .73 24 % 17.52 %
Preference
Share Capital
7500 .07 7 % .49 %
Reserves and
surplus
5000 .05 24 % 1.2 %
Bonds 16050 .15 10 % 1.50 %
Total 105350 1.00
WACC %
b) Recomputed cost of capital of organisation which would reflect changes.
The selected head of funds essentially tends to increase the obligations in the
organization, thereby limiting the general expenditure of capital. They intend to raise £16m by
offering a 12% callable bond. Such securities are offered at a rate of up to 5% and can be
recovered after 7 years.
The cost of handing over to such bonds can be calculated, for example,
The formula which would be helpful for performing calculation of bonds
= {Interest (1 – tax rate) + (Redeemable Value – Net Proceeds) / N} / (Redeemable Value + Net
Proceeds / 2) * 100
= {1.92 (1 - .30) + (16.80 – 16) 7} / (16.80+16 / 2) * 100
= (1.34 + .1143) / 16.40 * 100
= 8.87 %
They are demanding repurchasing of shares from an organisation @2.95 per share and
are expecting a related growth rate of 15%. They expect that the rates of bonds will remain
unchanged but prices of preference share seem to decline to .68p.

Further this problem can also be faced in case of even an existing listed company which
decides to invest in brand new line of business for it. In such situation company should not use
its WACC to evaluate this project. Instead of that it should assess the WACC for the appropriate
risk level.
For this the company needs Asset Beta or Ungeared Beta, which needs to be adjusted
according to own gearing level. The Asset Beta represents only systematic risk of the underlying
project or asset of the company and it does not represent any financial risk (Khan and et.al.,
2019).
The revised weighted average cost of capital considers the adjustment made as above and has
been computed as under:
Revised cost of capital:
Particular Amount Weights Cost of
Capital
WACC
Equity Share
capital
88500 .67 23.12 % 15.49 %
Preference
Share Capital
6800 .05 7 % .35 %
Reserves and
surplus
5000 .04 23.12 % .92 %
Bonds
Irredeemable
15000 .11 10 % 1.10 %
Bonds
Redeemable
16000 .13 8.87 % 1.15 %
Total 131300 1.00 WACC 19.01 %
Working notes:
The cost of equity can be computed as under:
It can be computed with the help of Gordon growth model method:
Ke = D1 / P0 + G
Revised Growth rate
= 42 % + 15 %

= 48.30 %
Expected dividend will be:
D1
= D0 + Growth Rate
= .31 + 48.30 %
= .46 p
Cost of Equity will be: -
= .46 / 2.95 + 48.30 %
= 23. 12 %
The cost of preference share would remain the same which is 7 %
c) Critically examine that weather it is sympathize that the firms would be capable to reduce the
weighted average cost of capital
If a firm introduces high liabilities in their growth capital framework, then the complete
expenditure of business capital will be declined or reduced by 1.70% and its adjusted average
weighted cost of capital would be resultant as 19.01%. If the cost of capital is in the fixed rate,
then it would be higher than the firm then the company is anticipated to spend a fix and
particular rate of interest and their anticipation or expectations would also become limited till the
interest being attained. If the company is engaged by higher equity capital in its capital based
framework, then the firm would be spending higher amount in relation to capturing the desires
and wants of a stock holder’s anticipation as they would be proceedings required risk in
investment circumstances being created in a chosen firm (Menon, 2019).
The Concept of ‘Relative Valuation’: One way to look at the practical implementation of
fair value within the valuation context would be to identify assets that are similar to the ones held
by the acquire company so that the values can be compared. This would be a significant
departure from the ‘intrinsic value’ approach that we have seen until now. Trying to get a value
that would be the nearest to the market price would mean that the valuation of a particular
portfolio, or a divestiture in an entity, would happen at an agreeable price that fits into the
normal distribution.
d) Critically analyse the connection between the Internal rate of return IRR and weighted average
cost of capital WACC on the purpose of investment
Weighted average cost of capital WACC

It would be very helpful for the company to create a collection of average cost of capital
in such a manner that the company would be capable to spend their returns against the investing
task being transferred out by the stockholders of the company. It includes some another
circumstances firm must issue shares when it need resources in it firm for the development and
expansion purpose. After such problems fascinated investors can spend its part of investment in
the firm.
Internal rate of return IRR
This method would be very useful when a firm desire to analyse its financial steadiness of firm
and analyse the profitable conditions frequently in a company over a given time period. It helps
the investor in terms of investing a related firm would prove to be advantageous and good or not.
There is one formula to compute the internal rate of return of a company.
IRR = Cash flow / (1+r)i
In this report it can explain the relation of IRR and WACC:
The final connection among them is IRR < WACC which shows that the internal rate of return
would be lower than the weighted average cost of capital. In general represent about the
dependent finance investment related tasks or activities which is upward from the anticipated
positivity of market competitors or in another part the investment task might also perform to be
more conservative if the purchaser is capable to spend for fixing the targets.
Also in other relationship between the IRR > WACC the weighted average cost of capital
and internal rate of return would be higher than the WACC. Basically it represent that the
investment in finance activity would be performed in a several firm it would be involved in
collaboration of several purchasers or investing the tasks performance to be highly positive then
the buying of product would be transferred out on a negotiated amount.
At this point it shows the IRR = WACC would basically mean that weighted average cost
of capital and internal rate of return they both perform to be similar as it mentions that the
investment based tasks are completed by investors in financial task working and it would grow
anticipation in the participation of market and would be reflecting the buying quantity which is
similar to the fair value of obtained company.
From an entity’s point of view, the most significant use of ROI would be to calculate the
returns generated by each individual / incremental investment on a project or different projects.
Thus, a company that has initiated a couple of projects during the year towards new business

lines can implement the ROI concept to calculate the returns on the investment and take further
decisions based on the same. Note that ROI is a historical ratio, so naturally the decision can
either only be a course corrective action, or channelling further investments into the more
successful business line (Mestry, 2018).
2. Investment appraisal method
a. Compute the investment appraisal method and suggest the economic viability of the
assessment
Payback period
Year Annual
Cash Inflow
Annual Cash
Outflow
Annual Net Cash
flows
Cumulative
Cash
Inflows
0 -588.5 -588.5 0
1 233.7 33.2 200.5 200.5
2 233.7 33.2 200.5 401
3 233.7 33.2 200.5 601.5
4 233.7 33.2 200.5 802
5 233.7 33.2 200.5 1002.5
6 233.7 33.2 200.5 1203
7 233.7 33.2 200.5 1403.5
7 SV 76.505 - 76.505 1480.005
Total 1635.9 -356.1 891.505 1480.005
Payback Period = Number of complete years + (Cash outflow – total inflow till date) /
Cumulative cash inflow
= 2 + (588.5-401) /601.5
= 2 + 0.312
= 2.312 Years
Interpretation: In the above computation of payback period, which is 2.312years. Which means
that the amount of return on investment 588.5 will be recover in approx 2 years and 4 months. It
is a good period of time of recouping the investment quantity for the Pizza mat limited firm
(Nam and et.al, 2019).

Average rate of return
ARR = Annual Average Profits / Cost of Investments * 100
= (127.36 / 588.5) * 100
= 21.64%
Where, Annual Average Profits = 1480.005/7
= 121.36
The computation of Average rate of return is 21.64% which represent the quantity of
investment return of 588.5 will become at a rate of 21.64%. It is higher and the risk in this
assessment is less.
Net present value
Years
Net
Cas
h
Infl
ows
Discounting @ 9% PV of Cash Inflows
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
PV of Cash Inflow (A) 1175.9784
PV of Cash Outflow
(B) 588.5
Net Present Value (A-
B) 587.48
The above table show the value of NPV which is approximately 587.47 as similar to the
amount of investment. The NPV includes the quantity and the rate of discounted, which mainly
includes all the another techniques of investment appraisal methods does not include. This
technique of investment appraisal is deliberated the most for accomplishing the needed return on
investment anticipation and forecasted amount. present value arrived post application of the
discount rate is more than the current cost of investment; the valuation of the enterprise is
attractive to both stakeholders as well as externally interested parties (like stock analysts). It

attempts to overcome the problem of over- reliance on historical data as seen in both the previous
methods.
Internal Rate of Return:
Years
Cash
inflows
Discounting
Factor 9%
PV value of cash
inflow
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
Total Cash inflow 1175.9784
Total Cash outflow 588.5
NPV (A-B) 587.4784
Years
Cash
inflows
Discounting
Factor 20%
PV value of cash
inflow
1 233.7 0.833 194.6721
2 233.7 0.694 162.1878
3 233.7 0.579 135.3123
4 233.7 0.482 112.6434
5 233.7 0.402 93.9474
6 233.7 0.335 78.2895
7 233.7 0.279 65.2023
Total Cash inflow 842.2548
Total Cash outflow 588.5
NPV (A-B) 253.7548
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
= 9% + (587.48 / 587.48 - 253.75) * (20 – 9)
= 9% + (587.48 / 333.73) * 11
= 9% + (1.76) * 11
= 9% + 19.36
= 28.36%
Interpretation: The above calculation of internal rate of return is mainly used for anticipating
the profitable condition of the projected investment. If the Internal rate of return is computed for

the projected assessment of Pizza MAT limited, then it can be 28.36%. it is higher than the
increase of discounted rate. Fully, it can be suggested that the assessment should be chooses
related on the upward techniques and calculation. But the most relevant techniques would be
selecting in net present value methods. It is the most appropriate methods and mainly the firms
refer to utilize this technique. So, on the basis of the net present worth the amount of investment
is 587.48. on that basis the assessment should be chosen by the firm Pizza Mat limited (Popkova
and Parakhina, 2018).
b. Critically measure the strategy of financial director of PM limited
In the organization the finance director has definite to utilize the 50% of the overall
outlay of the assessment will be utilized in re-buying the equity capital of the organization and
the remaining of the resources will be utilized for the firm dividend payment. The overall total of
money is utilized by the finance director for these intentions can be used for the another intention
which may give some future returns. This process will decline the capital which was utilized by
the firm form the general individual. The cash paid on dividend by the firm to the stockholders
will maximise the goodwill in the market and investor will be piercing to investment high in the
company (Nguyen and Dinh, 2021).
c. Describe the advantages and limitations of investment appraisal methods.
Investment appraisal methods is manner in which company access the viability of the
assessment and the earning which can be achieve from the assessment in the life cycle of the
operation. This assists is called the long term profits condition of the organization.
Payback period: It explains the time duration in which the organization will recoup the initial
investment of the organization. It does not deliberate the quantity of the project inflows.
Advantages:
 It concentrates on the assessment will get back to the initial outlay of cash rarely.
 Computation of the payback duration is easier as related with the another
techniques.
 Payback maximises the liquidity of the firm earlier.
Disadvantages
 It avoids the time worth of money.
 It extra watches the inflows after the time where the assessment gives the
appropriate investment.

 It suggests high assessments which returns the appropriate investment in lesser
duration of time.
Net present value: It computing the present value of upcoming outflows of the assessments. It
does compute the quantity of profit which the firm can gain from the assessment in terms of
present worth.
Advantages:
 It deliberates the time worth of money of the upcoming cash flows statement.
 It deliberates the capital cost which is invested by the firm.
 It forecasts the upcoming cash flows of the organization by utilizing the
discounting component.
Disadvantages
 It does not provide the facility of the assessments which are separate sizes and
time duration.
 This technique does not deliberate the opportunity cost of the assessment.
 It does not deliberate the qualitative components.
Accounting rate of return: This appraisal method is utilized to identify the rate of return which
are gained from the assessment by relating it to the appropriate investment created by the firm. It
is separate from the Payback and NPV duration, ARR defined that the assessment will yield (let
say 20% ) of the investment created in the assessment (Popkova and Parakhina, 2018).
Advantages:
 It identifies the incomes that will be gained from the assessment.
 It assists in relating multiples assessment on the basis of rate of return for the assessment.
 Assessments prefer the short term investor which will give high returns in lesser duration
of time.
Disadvantage:
 This appraisal method deliberates only the inflow of the assessments and not deliberates
the component of discounting, taxes, etc. of the assessments.
CONCLUSION
As it is concluded from the above report that it maintains the weighted average cost of
capital and internal rate of return is helpful to identify weather the investor must be investing in a

related assessment or not. It would also offer as a guide through which the assessment would
offer to be profit condition a better in long run. In this report it also gives further helps and
suggestions that it would be helpful for good working and functioning of a company.

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