Financial Management: Long Term Finance and Investment Appraisal Techniques

Financial Management

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Question 2 – Long term finance: Equity Finance............................................................................1
1. Calculate the profit after tax @ 20% on shareholders’ funds..................................................1
2. Evaluate the following terms which mentioned below............................................................2
3. Evaluate the benefits of scrip divided in context of shareholders or companies.....................4
Question 3 – Investment Appraisal Techniques..............................................................................5
1. Calculate the following aspect by using investment appraisal techniques..............................5
2. Critically evaluate the benefits and drawbacks of different investment appraisal technique..9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management is the process of managing company's overall
financial resources which is an important for management where they can used to
assess, calculate or evaluate financial performance(Browne, 2016). Management teams are able
to assess real success or financial assistance of the business with the aid of different strategies or
approaches. Manager must make sure for necessary financial resources that help in achieving
desired aims and objective. The main purpose of this evaluation is to raise awareness of the
importance of financial management in organisations. This task is focused on two problems
related to long-term financing and various strategies for evaluating investment.
MAIN BODY
Question 2 – Long term finance: Equity Finance
1. Calculate the profit after tax @ 20% on shareholders’ funds
Issue of Right Share: This is an open invite provided to its current investors by firms to
purchase some new shares (Thom, 2019). It offers protection for current shareholders, which is
rights in which new shares can be purchased at a discount price compared to the market rate.
They need financial support in connection with Lexbel plc so they released the right securities in
order to produce flow in company or it would allow them to efficiently execute their mission.
There are different elements needed to measure the correct shares problem and the
measurements are mentioned below:
Market price of each share = £ 1.90
Share which company wants to issue = £ 180000
In context of Lexbel plc, finance director suggest three different issue prices such as £
1.80, £ 1.60 and £ 1.40.
Calculation of Profit after Tax (PAT):
Shares of Lexbel plc Amount
Ordinary shares at 50 P. £ 300,000
Add: Reserve £ 400,000
Total £ 700000
1

Profit After Tax (PAT) { 700,000 * 20 % } £ 140,000
2. Evaluate the following terms which mentioned below
Number of shares which required to issue:
Formula:
Number of Share Issued = Aggregate Funds to be elevated / right issue prices
Calculation:
Issue Prices of Shares Option 1 Option 2 Option 3
Existing shares in numbers 600,000 600,000 600,000
Fund to be raised (A) 180,000 180,000 180,000
Suggested right issue prices (B) 1.80 1.60 1.40
Number of shares to be issued
(A/B)
£ 100,000 £ 112,500 128,571.43 or £
128,571
Theoretical ex-rights price:
Calculation of theoretical ex-right price:
Particulars Option 1 Option 2 Option 3
Suggested prices to issue shares £ 1.80 £ 1.60 £ 1.40
Fund to be increased £180,000 £180,000 £180,000
Number of shares required to issue £100,000 £112,500 £128,571
Pre right issue £1140,000 £1140,000 £1140,000
Post right issue £1320,000 £1320,000 £1320,000
Theoretical ex-right price £ 1.89 £ 1.85 £ 1.81
Expected earnings per shares:
Overall calculation of expected earnings per share is based on given information and
further it mentioned below with the formula:
Expected EPS = Share before issue of rights * (Theoretical ex-right price / Current market price)
2