Financial Management: Long Term Finance and Investment Appraisal Techniques

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 2. Long Terms Finance.....................................................................................................3
(a). Calculate PAT of 20% on shareholders funds of Lexbel Plc................................................3
(b). Determine various aspects which mentioned below.............................................................4
1. Number of shared to be issued.................................................................................................4
2. Theoretical ex rights price.......................................................................................................4
3. Expected earning per share......................................................................................................4
4. Form of issue of right issue price............................................................................................5
5. Evaluation of best option among these above mention options..............................................6
(c). Evaluate the benefits of scrip divided in context of shareholders or companies...................6
Question 3. Investment Appraisal Techniques................................................................................7
(a). By using investment appraisal techniques, calculate below mention following methods....7
1. Payback period.........................................................................................................................7
2. Accounting Rate of Reruns......................................................................................................8
3. Net Present Value....................................................................................................................9
4. Internal Rate of Return...........................................................................................................10
(b). Critically evaluate benefits or limitations of different investment appraisal techniques
....................................................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES .............................................................................................................................14

INTRODUCTION
Financial management is essential for every organizations because management will used
to analyse, measure and interpret financial results. With the help of various techniques or
method, managers able to evaluate actual performance or financial helps of company (Amanah,
Rahadian and Iradianty, 2016). Management should ensure that, they manage financial resources
which helps in achieving their desired goals & objectives. Main aim of this assessment is to
make people aware about importance of financial management in organizations. This assignment
based on two questions which are about long term finance and different investment appraisal
techniques.
MAIN BODY
Question 2. Long Terms Finance
(a). Calculate PAT of 20% on shareholders funds of Lexbel Plc
Issue of Right Share: It is an invitation which is offered by companies to its existing
shareholders to buy some additional shares. It provide security to existing shareholders that is
rights where they can purchase new shares at discounted rate in comparison to market rate. In
context of Lexbel plc, they required financial helps so they issued right shares in order to
generate flow in business or it will make them able to perform their task effectively.
There are relevant aspects which required to calculate issue of right shares and its
calculation mentioned below:
Shares which they wish to issue = £ 180000
Market price = £ 1.90
Finance director of company also recommended three different issue prices such as £
1.80, £ 1.60 and £ 1.40.
Calculation PAT:
Issued shares of Lexbel plc Amount '£'
Ordinary shares each 50p. 300,000
Add: Reserve 400,000
Total 700000

Profit After Tax (PAT) { 700000 * 20 % } 140,000
(b). Determine various aspects which mentioned below
1. Number of shared to be issued
Formula:
Number of Share Issued = Aggregate Funds to be elevated / right issue prices
Calculation:
Issue Prices Condition 1 Condition 2 Condition 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
2. Theoretical ex rights price
Theoretical ex rights price (TERP) is the process of estimating price of shares which
company follow at the time of rights issues. Usually companies estimated weighted average price
per share or new as well as existing shares (Arifin, 2017). It will be done, in order to generate
more finance in the business in terms of capital and give preference to existing shareholders.
Director of Lexbel plc wanted to issue shares at three different prices, so calculation is based on
it and it mentioned below:
Calculation of theoretical ex rights price:
Particulars Condition 1 Condition 2 Condition 3
Recommended 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