Financial Management: Valuation Techniques and Investment Appraisal

This document discusses financial management and its importance in achieving business goals. It explores valuation techniques such as PE ratio, dividend valuation, and discounted cash flow. It also provides calculations for investment appraisal techniques like payback period, ARR, NPV, and IRR. The benefits and limitations of these methods are discussed as well.

Financial Management

Contents
INTRODUCTION...........................................................................................................................................4
QUESTION 2.................................................................................................................................................4
Mergers and takeovers............................................................................................................................4
b. Critically discuss the problems related with the valuation techniques and provide recommendations
.................................................................................................................................................................6
QUESTION 3.................................................................................................................................................7
a. Calculation of different investment appraisal techniques such as pay back period, ARR, NPV and IRR
.................................................................................................................................................................7
b. Limitations and benefits of different investment appraisal techniques............................................13
CONCLUSION.............................................................................................................................................15
REFERENCES..............................................................................................................................................16

INTRODUCTION
Financial management is the method of having to take care of all funding associated
operations that an entity conducts in order to achieve defined business goals. It's
concentrated primarily on applying operational concepts to all the investor's numerical resources.
Potential budget criteria for activities may be calculated with both the assistance of it. To ensure
that all the processes connected with it have been carried out consistently, it is very essential for
supervisors to thoroughly review final statements so that decisions can be made for the potential.
Questions two and three are chosen to complete this Analysis (Antonopoulos and Hall, 2018).
This report will address a number of subjects like market valuation of other takeover
organisation, possible changes in corporate and short-term impact on Aztech Company. In
addition, measurements are also performed in this plan with the aid of various portfolio
evaluation methods together with their benefits and drawbacks.
QUESTION 2
Mergers and takeovers
Price earnings ratio: The profit-to-earnings ratio (PE Ratio) is the calculation of the stock
price compared to the company's total net profits per share. PE ratio indicates energy needs from
investors for a stake in a company. A high PE ratio usually implies higher demand, as companies
expect expected earnings development. Furthermore, it shows how the consumer appreciates an
inventory. In certain cases, companies that use a large price-earnings ratios are seen as equities.
It generally suggests that stakeholders have high hopes for potential increases in profits and will
be able to contribute extra to those because it implies a positive potential activity. In certain ways
companies with a low price-earnings ratio are perceived to have underrated assets of their own.
Typically this ensures the product selling price is extremely low. An entity with such a non-P / E
ratio is usually, aside from potential service, a warning of a low existing.
Aztec P/E ratio 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

Dividend valuation method: This is similar to the amount of the cash flow n specific
day of operation that enables to split the capacity over a given time frame by one point. This
strategy is often pointed to as DDM, wherein the cost of the product depends on the possible
dividends that can be charged because they can soon be overlooked at the annual average cost.
That is, it is a way of assessing a company according to the premise that the portfolio should be
valued the diminished value of most of its forthcoming distribution responsibilities (Baños-
Caballero, García-Teruel and Martínez-Solano, 2016). In other words, it is employed mainly to
rate shares dependent on the net potential value of potential fluctuations.
To calculate of dividend require the dividend model values for both g and r such as:
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
Discounted cash flow ratio: The discounted cash flow formula (DCF) is equal to the
amount of its cash flow in each cycle separated by another and that cost of capital elevated to the
value of this time level. Real benefit guidance is useful for getting stakeholders, within the idea
that even then the quality of a benefit can be valued greater for the price of the identical edge that
is only possible at a later date. An investor will use the discounted cash flow approach to
calculate the current amount from many conflicting projects, and will typically prefer that one
with the maximum nominal value as well (Brooke, 2016).
There is using discount cash flow’s using WACC of Aztec
Present value of earnings = 40.4 * 1.02 / (0.09 – 0.02) = 588.68
Present value of assets sale = 21m / 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 related with the valuation techniques and provide
recommendations
Price earnings ratio
Benefits:
1. Assess growth potential: PE ratios enable stakeholders assess the potential growth of the
enterprise until they participate. The ratios indicate businesses that can be impacted by drastic
price change. High PE contributes to the company's selloff while low PE demonstrates the
organisation's continuous production.
2. Growth estimates: P/E tests a future growth potential by considering the current business
circumstances and contrasting it to past results. This also dictates what the investors are created
for business.
3. Comparison: PE will be used for comparing and valuing holdings of corporations with each
other rendering it a valuable quantitative device. This includes the organizational background
throughout a particular market area (Danes, Garbow and Jokela, 2016).
Limitations
1. Bad decisions: This can result in poor choices impacting the company to meet the planned
income.
2. Non appropriate for determining damages: Loss-making firms may not use PE ratio because it
cannot calculate liabilities at the early days of overall business.
3. Historical earnings: P/E expectations are depended on current records, so it is challenging to
forecast such profits as they can not accurately estimate profits.
Dividend valuation model

Benefits: The model does not try to assume wild predictions in regard of inventory potential
increment, as the rate of dividend improvement cannot be higher than the rate of return for the
methodology to work. All it does is make a decision based about what the payout is being
charged through currently as well as on the expectation that throughout the forecast the dividends
will rise at an un-outrageous amount. If the inherent investment in the shape of investment
arrives back additional capital well that's just a side product of all of that.
Limitations: The main drawback of this model that for this require large number of assumptions
that cannot possible. A high level of details may outcomes in overconfidence and looks at the
organisation valuation of competitors. It is most challenging for the weighted average cost of
capital.
Discounted cash flow
Benefits: It is less affected by unpredictable external influences, as it is an in on itself-looking
mechanism that focuses too much on the company's core assumptions and strong value driver
forecasts (Dwiastanti, 2017). Unlike the proportional assessment approach, financial procedures
and expectations are less impacted as it focuses on producing cash flow.
Limitations: The estimation reliability calculated and uses the DCF approach depends heavily on
the consistency of the calculations about Free Cash Flows, Target Price, and Rate of return. The
extracted price is extremely vulnerable to the references provided, which results in radically
different appraisals by specific observers depending on the subjective view of the business's
compensatory picks.
QUESTION 3
a. Calculation of different investment appraisal techniques such as pay back period, ARR, NPV
and IRR
Investment evaluation can be described as a mix of numerous kinds of approaches
applied by companies to evaluate the effectiveness of the selection of alternatives available for
them in order to make potential investment (Hashim and Piatti-Fünfkirchen, 2018). The main
aim is to assess the feasibility of the planned proposal or the alternatives to allocate resources in
the prospect chosen by a client. Lovewell Limited is thinking of buying a new computer to

enhance company efficiency. The corporation may use investment evaluation for the intention of
assessing whether it would be able to support the business or not specific strategies. Each of
these definitions is as follows:
Provided information for all the investment appraisal techniques:
Payback period: It is a method used to calculate the time that will be required to restore
financial worth through the overall accumulation of funding. This is deemed the best way of
measuring an investment (Hoque, 2017). Using it, Lovewell Restricted managers will be
informed to decide certain they spend resources to acquire a new machine or not as it will
instruct managers to decide the period it takes to recover. For the business the figures are as
pursues:
Formula: There are two various manners to compute payback period. Formulas for both of them
are as follows:

As the cash inflows for Lovewell Limited are same for six year's duration therefore first
method will be applied on the calculations.
Pay back period = 275000/ 72500
= 3.79 years
Accounting rate of return: Organizations are using this investment appraisal method to
calculate the yearly income or income that could be achieved from expenditure. In many other
terms, it could be described as a methodology that will direct stakeholders through engaging in a
venture to slow the rate of return that they will attain (Mitchell and Calabrese, 2019). Analyzing
the new machine will enable it improve revenues and income or not would be advantageous for
Lovewell Limited. For the client the formula is as follows:
Formula: Net profit after dep. and tax / average initial outlay of project *100
ARR = 33542 / 158125 *100
= 21.21%
Note: Thus, since cash inflow is the same for certain times, the actual amount will also be equal
to in each year positive cash flow so that 33542 is used for estimation.
Working notes: Calculation of net profits is as follows:
Average initial outlay = Initial outlay of project+ residual value / 2

= 275000 + 41250 / 2
= 158125
Net Present value: This is a method that businesses use to measure the disparity between
reduced cash inflow and actual project expenditure in order to decide the intrinsic value of a
potential investment. Organizations determine, with the aid of it, that they will not spend money
in upcoming projects. This will help Lovewell Limited's finance director to decide if buying a
275000 pound computer is advantageous to the company or not. Computation of the company's
meaning is as adopts:
Formula: Total discounted cash inflow – initial outlay of project
NPV = 319033.75 – 275000
= 44033.75
Working notes:

Internal rate of return: It is a strategy of expenditure evaluation which corporations
utilize to evaluate the estimated cumulative annual gain level of a projected project. In certain
terms, it can be characterized as a minimal rate of return used only by company executives to
determine the potential plan which could produce a sufficient default rate (Siminica, Motoi and
Dumitru, 2017). Lovewell Limited is useful as it will allow the administration to evaluate
whether or not the computer to be ordered for industry would increase revenue. Calculating them
is as adopts:
Formula: R1 + (R2 – R1) / NPV1 – NPV2 * NPV1
= 14 + (18 – 14) / 31900 - (-5262) * 31900
= 14 + 4 / 37162 * 31900
= 14 + 3.433
= 17.43%
Working notes:
Calculation of NPV @ 14%

Calculation of NPV @ 18%
Based on that figures, it is suggested that Lovewell Limited purchase a new machine as higher
income and sales would be advantageous for the organizations. The project's payback period is
3.79 years, which is a decent time-limit. The project's IRR and ARR are also very high, resulting
in higher income for both the company and the investor. At the either hand, NPV also shows

promising outcomes, so the expenditure of 275000 would be advantageous to the company
because all the strategies of portfolio assessment have culminated in its favor.
b. Limitations and benefits of different investment appraisal techniques
There are different forms of asset evaluation approaches that may be utilised by
companies to determine whether or not the planned expenditure will benefit favorably for the
company. Lovewell Limited will also be using all of this to assess that the new machine will be
capable of helping the company increase its efficiency and efficiency (Skimmyhorn, 2016). They
have numerous advantages but there are many drawbacks which are listed elsewhere here:
Payback period: There are defined various benefits and limitations of particular
investment techniques in particular manner such as:
Benefits: The measurement of this methodology is simple to explain and implement which
allows executives to make fast judgments. This is known the most powerful approach in the case
of confusion, since this offers fast and reliable outcomes. In the measurement payback cycle,
sustainability is favored, which allows administrators to ensure that their actions are good for the
company.
Limitations: This approach is impractical because it has not been in use for the last few decades.
Besides this competitiveness this strategy that fails to recognize the yield on plan expenditure is
often overlooked. This approach is discriminatory towards lengthy-term projects as it can
produce misleading outcomes in these circumstances.
Accounting rate of return: To apply this technique for the investment projects required
to know its benefits as well as limitations in particular manner like:
Benefits: This offers a straightforward picture of productivity, as net income is used to measure
rather than cash inflows (Valencia-Cárdenas and Restrepo-Morales, 2016). Cost effectiveness
and profitability of various projects could be calculated with the aid of it which is useful for
making financial decisions. It will supports to shareholders' expectations because they are
extremely keen on having better returns on the money they receive inside the company.

Limitations: This approach ignores the amount of time a expenditure takes to produce income. In
various cases, for example, it is not beneficial if a corporation is unable to evaluate activities in
that expenditure installments are produced rather than twice, because reliable outcomes that fails.
Net present value: To analysis of this technique require to know its benefits and
limitations in proper way such as:
Benefits: This is useful in decision-making as this takes into account the time value of money in
the current price computations. When measuring NPV, this approach considers both the
advantages and disadvantages of both the investing possibilities then allows provision for their
spacing.
Limitations: The way of calculating it is quite complicated, and the findings produced by this
technique are not simple to comprehend. This cannot establish a conditional benefit calculation
or a particular profit value that can be obtained on the made in the past investment by the
company. When the proposals are not of the same scale otherwise this approach is not effective
because it cannot evaluate these (Waxman, 2017).
Internal rate of return: This appraisal technique has various benefits as well as
limitations in systematic way such as:
Benefits: When measuring IRR, then interpreting the outcomes and visualizing them is quite
easy. Hence it is not appropriate to estimate the return on investment or the bottleneck limit. It
takes into regard opportunity cost which tries to increase the rate of viability of this system.
Using it, precise and identical level of returning could be determined for the projects, that is
helpful for choice-making in the management.
Limitations: If the tasks that need to be evaluated are similarly exclusive because this approach
would neglect them. Outside considerations such as cost savings are not assessed for which inner
rate of return is determined. This approach ignores lots of important variables including
estimated costs, task volume and length, which can contribute to misleading findings (Yang,
Ishtiaq and Anwar, 2018).

CONCLUSION
It is concluded that from the aforementioned project study that financial control is a
methodology that all executives of all organizations need to concentrate on so that all operations
can be properly tracked, managed and analyzed. This is very necessary for all the companies to
ensure that successful choices are made to leverage monetary fund’s in order to achieve greater
income and profits. This is also relevant for investors to evaluate the price and book value of
shares in order to calculate the various ratios of takeover company like price earnings ratio,
discounted cash flow. When applying corporate management plans, it is important for
organizations' top-level managers to evaluate short-term influences on restructuring and
organization issues. If a business decides to substitute its old machine with a modern one instead
assessing its competitiveness and rate of return is very relevant to it. Various investment
assessment methods may be used for this purpose. There are terms of payback, net present value,
valuation and the internal rate of return.

REFERENCES
Books and Journal