Financial Management: Valuation Techniques and Investment Appraisal

Financial Management
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INTRODUCTION
Financial management includes the scheduling, coordination, monitoring and regulation of
financial operations, such as the acquisition and use of the company's funds. It implies adapting
the general management principles to the company's financial capital (Hoque, 2017). In this
assessment, we have to address two problems and it is based on merger & takeover and
investment appraisal techniques. There are several functions which are used for different purpose
such as estimation of capital requirement, capital composition, source of funds, investment of
funds etc.
MAIN BODY
Question 2
a. Price Earnings Ratio
Price earnings ratio: It is the connection between the share price of a company and the
earnings per share (EPS). It is a common ratio which gives shareholders a better understanding
of the firm's value. The P / E ratio reflects market expectations and is the price that is expected to
pay per amount of current earnings.
Aztec PE ratio = Share price / EPS
= 3.89 / 0.21 = 18.52
Trojan Plc = 40.4 / 147
= 27.48
Share price of Trojan Plc = 18.52 * 27.48
= 5.08
Total market value = 147 * 5.08
= 746.76
Here it is assumed that the market expects Aztec to produce a return on Trojan's assets on its
own assets comparable to that on.
Dividend valuation model: Dividend discount model (DDM) is a way of valuing an
organization's stock price based on the assumption that its stock is worth all the effort of all its
future dividend payout, compared to its value (Hashim and Piatti-Fünfkirchen, 2018). To put it
another way, securities are used to calculate based on the capital cost of the future distributions.
To calculate of dividend require the dividend model values for both g and r such as:
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G = (13 / 10) = 1.14 %
Alternatively
g = 4 √ (13 / 10) = 1.14%
The cost of equity using CAPM
Ke = 5 + (1.10 * (11 – 5)) = 11.60%
Po = 0.116 – 0.114 = 0.002
Total market value = 147 * 0.002 = 294m
Discount cash flow method Discounted cash flow (DCF) is a valuation instrument used to
calculate the value of an investment based on its expected cash flows. The DCF evaluation
attempts to quantify the worth of modern spending based on forecasts of how much income it
would produce in the present. This applies both to monetary donations from creditors as well as
to company owners wanting to make changes to their companies, such as purchasing new
appliances.
Discount cash flow method by using WACC of Aztec
Present value of earnings = 40.4 * 1.02 / (0.09 – 0.02)
= 588.68
Present value of assets sale = 21 million / 1.09
= 19.27
Present value of synergy = 5 / 0.09
= 55.56
Total present value of Trojan Plc = 588.68 + 19.27 + 55.56
= 663.51
b. Critically discuss the problems associated with valuation techniques and recommend the
board of Aztec to use
It is critically analyzed that to solving these problems required to analysis of different
advantage and disadvantages of these techniques such as:
Price earnings ratio
Advantage: P / E analyses a future growth prospects by taking into account the firm's
circumstances and contrasting them to past results. This also dictates what the investors are
created for. PE ratios help shareholders assess the potential for growth before investing in the
business. The ratios indicate businesses that can be impacted by drastic price change. High PE
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