Financial Management: Dividend Policy and Investment Appraisal Techniques

Financial Management

INTRODUCTION
FM is defined as planning, controlling, analysing, directing the basic business activities
in the business organisation (Gottschalk, 2016). It helps in dealing investment of a business
entity that help in the business decision making system. Financial management is application of
the fundamental accounting principle of management to financial aspects of a enterprises. It may
includes financial ratio, debts, equity, dividend pay out and investment methods. For the better
understanding of financial management, this report covers dividend policy of planet company
and investment appraisal techniques of a food manufacturing company. This report helps in the
decision making activities of the business that evaluates the dividend pay out policy of equity
share capital and investment tool like pay back period, average rate of return, internal rate of
return to choose the better option in the business that may produces the more profit in the future.
MAIN BODY
Question 01
(A) Dividend policy
It is a financial policy that defined as pay out cash dividend to the shareholders of the
company (Greenbaum, Thakor and Boot, 2015). It is financial decision that concerned with a
certain portion of the net profit after tax of a firm is to be paid out to its real owner or
shareholder. A business firm decides the dividend portion in order to pay the dividend out of the
net generated revenue. There are various model of the Dividend policy like Walter's model,
Gordon's model.
In the given context calculation of the fair price of the planet's shares has been done as
follows:
This year dividend has decided by the company 20p, required rate of the return is 14%.
As per the this question, Gordon's model of the dividend is more appropriate for the calculation
of the growth model. Growth rate is calculated for all of the year
D= 20p
k= 14%
g1 = (14-13) / 13 * 100 = 7.69%
g2 = (17-14) / 14 * 100 = 21.43%
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g3 = (18-17) /17 * 100 = 5.88%
g4 = (20-18) /18 * 100 = 11.11%
here, D = dividend , k = cost of capital, g= growth rate for the years
after calculating the growth rate, dividend formula as follows
= D1 / (k-g)
here, D1 = dividend per share for the next year or expected year
k= required rate of return or cost of equity that is estimated by the dividend growth model
g= expected dividend growth rate
for the first year, share price is calculated as
value of the share price = D1 /(k-g)
= 14 / (0.14- 0.0769)
= 2.22$
for the second year,price of the share is estimated as
value of the share price = D1 /(k-g)
= 17 / 0.14-0.2143)
= 2.28$
for the third year, price of the share is reckoning as
value of the share price = D1 /(k-g)
= 18 / (0.14-.00588)
= 2.22$
for the forth year, price of the share is figuring out as
value of the share price = D1 /(k-g)
= 20 / ( 0.14- 0.1111)
= 6.92$
so here growth is inconsistent but the dividend pay out is average between 13 p to 20 p.
The average is 11.53% that indicates the dividend of the next year will be as follows
Growth in the price of share = (21.87 – 20)/ 20 *100
= 10.69%
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