Financial Management: Size of Dividend and Investment Appraisal Techniques

This report focuses on the importance of financial management for businesses, specifically the size of dividend and investment appraisal techniques. It discusses the assessment of dividend size, issues to consider, and the impact of different options on shareholder wealth. Additionally, it explores the use of investment appraisal techniques to evaluate the feasibility of a new machine.

Financial
Management

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
1. Assessment of the size of dividend to offer returns to the stakeholders of the organisation...1
2. Discussion of the issues which are required to be focused while deciding the size of
dividend.......................................................................................................................................2
3. Analysing the impacts of three options on the wealth of all the shareholders who are owning
12500 shares in the company.......................................................................................................2
4. Discussion of how the decisions of company will leave influence on the opportunity to
make investment of 70 million pounds in the project which is having positive NPV.................4
QUESTION 3..................................................................................................................................4
1. Making calculation on the basis of different investment appraisal techniques so that
recommendation regarding economic feasibility of the machine could be provided..................4
2. Discussion of different drawbacks and benefits of all the investment appraisal techniques...8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management is a technique which is focused by companies to manage the
investments and other financial activities so that the position of business could be maintained in
the market. If the managers working within the entity are not able to perform all their duties
properly then it may result in weak execution of business and improper performance. When it is
focused by managers then they have to pay attention towards different elements. These are
dividend policy, investment appraisal techniques and other final accounts related activities (Al
Nuaimi and Nobanee, 2019). In this report different aspects are focused to understand the
importance of financial management for the businesses. The two questions that are selected for
answering purpose are first and third. First question is about dividend options and size of
Squeezeco. Third question is all about use of investment appraisal techniques for assessment of
feasibility of the new machine in which investment will be made by Lovewell Limited. Different
topics that will be covered in this report is analysis of size of dividend and the issues that should
be focused at this time, impact of different investment decisions on ownership of shareholders
etc. Apart from this, different techniques of capital budgeting such as IRR, NPV, ARR and
payback period will also be used to evaluate feasibility of the project in this assignment.
QUESTION 1
1. Assessment of the size of dividend to offer returns to the stakeholders of the organisation
When an individual invest money in shares of a company then a right to gain returns on
the same is provided by the entity to the shareholder. The return is known as dividend which will
be gained on the total invested amount. While planning to offer return to the shareholders it will
be very important for the companies to decide the size of the dividend. The key factors which are
focused in this process are as follows:
Requirements of the enterprise: It is very important for the management teams of all
the entities to assure that they are able to manage the good financial performance of business. If
it will be good then the size of dividend will be big because in this situation the organisation will
generate higher profits and will be able to offer good dividend to the shareholders (Aldakhil,
2016).
Fair consideration: It is another factor which is focused while planning to decide the
size of dividend. While assessing it for managers it will be very important for the managers to
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determine that they are able to analyse the level of returns that shareholders are willing to
generate on their investments. With the help of it, the managers can decide the size of return
which should be offered to the shareholders.
2. Discussion of the issues which are required to be focused while deciding the size of dividend
When the managers will be formulating decision regarding size of dividend then it will be
very important for them to take all the issues in to consideration which may take place while
deciding the size. All the issues are as follows:
Improper financial position: While deciding the size of dividend it will be very
important for the managers to make sure that they are able to analyse the financial position. If it
will be weak then it may affect the dividend which will be offered to the shareholders. This
problem could be faced by the entity while offering dividend because if it will be weak then no
dividend will be offered (Arofah, Purwaningsih and Indriayu, 2018).
Unsatisfied requirements of the business: It is the second problem which is faced by
the entities when they are planning to decide the size of dividend. If the finance related needs of
businesses will not be met then it may result in small size of dividend. When the requirements
will be fulfilled then it will result in higher dividend for the shareholders.
3. Analysing the impacts of three options on the wealth of all the shareholders who are owning
12500 shares in the company
All the computations of dividend by focusing upon all the options that are available to
Squeezeco are as follows:
i. First option: Cash dividend of 15p per share
When the entities offer the dividend in cash or bank balance then it is known as cash
dividend. If this option will be used by Squeezeco for offering dividend then its calculation will
be as follows:
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If the cash dividend will be selected by the organisation then the total value of dividend
offered to the shareholders is 187.5 pound per share.
ii. Second option: 5% scrip dividend to the shareholders
If the business entities offer shares instead of cash dividend to the shareholders then it is
considered as the scrip dividend. When it will be selected by the organisation then following
calculations will be used to analyse the impact of it on the ownership of shareholders:
If scrip dividend will be provided to the shareholders then it will result in 270 pounds per
share total dividend worth of the shareholders for each share owned by them (Brooke, 2016).
iii. Third option: Repurchasing the 15% of the ordinary shares of the organisation
If the managers of a company analyse that the value of shares is decreasing continuously
so in this case the enterprises plan to buy their own shares so that value of shares could be
increased. The calculation on the basis of this option are as follows:
On the basis of third option it has been analysed that when it will be selected by the
organisation then it will increase the worth of shareholders by 716 pounds per share.
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By taking all the above options in to consideration it has been recommended to the
managers of Squeezeco to use the third option as it will result in higher worth to the
shareholders.
4. Discussion of how the decisions of company will leave influence on the opportunity to make
investment of 70 million pounds in the project which is having positive NPV
If an organisation is willing to make investment in a project then it is very important to
analyse the net present value of the project. When Squeezeco will be willing to invest 70 million
pounds in an investment opportunity then it will be very important for it to make sure that it
analyses the net present value of the same. When it will be positive then it will affect the
decision making. If it will be positive then it can help the organisation to make more investment
so that higher returns could be generated in future (Howard, 2016).
QUESTION 3
1. Making calculation on the basis of different investment appraisal techniques so that
recommendation regarding economic feasibility of the machine could be provided
Investment appraisal techniques are some of the approaches that are used by companies
to evaluate that the project which is selected by them for investment purpose will be beneficial
for business or not. If calculation of all of them will be not proper then it may result in wrong
decisions for business. Lovewell Limited which is a food manufacturer is planning to buy a new
machine and to analyse the feasibility of it the entity is planning to use different investment
appraisal techniques. All of them are as follows along with the information which will be
required for calculation purpose:
Provided information for all the techniques:
Cost of new machine or initial investment = 275000
Annual cash inflow for all the years = 85000 P.a.
Annual cash outflow = 12500 P.a.
Useful life of the machine = 6 years
Method of depreciation = Straight line method
Residual value of the machine = 15% of the cost of machine
Cost of capital = 12%
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Net present value: This capital budgeting technique is used by entities to analyse
variation between initial investment and total discounted cash inflow so that actual present value
could be analysed. It facilitates the management decisions by providing information about the
ability of project to generate profits in upcoming years if it will be selected for investment
purpose (Lopez and Alcaide, 2020) (Mutiganda, 2016)x. When Lovewell will be evaluating the
new machine then it could be used by financial managers. The calculation of it for the machine is
as follows:
Formula: Discounted cash inflow – Cost of project
=318700 -275000
=43700
Payback period: For all the businesses it is very important to analyse the time period
which will be taken by the investment or the project to repay the value of initial investment. This
capital budgeting technique will help the Lovewell Limited’s financial managers to evaluate that
the new machine in which investment will be made will meet the BEP properly or not. If the
time taken by it will be very high then entity should ignore it. The computation of it for the
enterprise is as follows:
Formula: Cost of project / cash inflow
=275000 /85000
=3.79
Accounting rate of return: It is one of the very important techniques of capital
budgeting used to appraise investment proposed by companies for growth of business. It helps to
determine that the money which will be invested in a project will offer higher profits to the
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business or not. The lower percentage shows low profitability higher rate of return reflects high
profits from the investment. The financial managers in Lovewell Limited can use it to analyse
feasibility of new machine in which 275000 pounds will be invested (Lopez and Alcaide, 2020).
Calculation of it along with the assessment of net profits is as follows:
Formula: Net profit/ cost of project *100
=33541.67 /275000*100
= 12.19%
Working notes:
Internal rate of return: In capital budgeting this investment appraisal technique is used
to evaluate the profitability of investment which will be made in future. It facilitates the decision
making of investing money in a project as it helps to determine the rate of return which could be
generated by selecting the same. For evaluating the feasibility of new machine which will be
bought by Lovewell Limited it could be used (Mutiganda, 2016). The detailed calculations of it
for the organisation are as follows:
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In order to calculate IRR two percentages that are selected are 12% and 20% and present
values for both of them are as follows:
PV @ 20%:
PV @ 12%:
Formula: Lower Discount Rate + Present Value of Lower Discount Rate – Cost of project/ PV
of Higher Discount Rate – Present Value of Lower Discount Rate * Higher Discount Rate –
Lower Discount Rate
=12+ [(318703-275000)/ (254881-318703)] *20–12
=12 +(-5.44)
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=17.44%
Recommendation: On the basis of calculations of payback period, NPV, ARR and IRR
it has been determined that feasibility of the new machine investment is very high. If Lovewell
Limited will invest 275000 pounds in this project then it will result higher profits for the entity
so it is recommended to the organisation that it should buy the new machine. The main reason
for this recommendation is that it will be beneficial for business.
2. Discussion of different drawbacks and benefits of all the investment appraisal techniques
Lovewell Limited is looking for investing 275000 pounds in a new machine for business
development purpose. For evaluating feasibility of this project different investment appraisal
techniques will be used by the organisation (Mwangi, Kiarie and Kiai, 2016). While using them
it will be essential for the managers to analyse benefits and drawbacks of all them and these are
as follows:
Net present value: There are several advantages and disadvantages of using it for
evaluating feasibility of an investment proposal that are required to be focused by all the
companies like Lovewell Limited before investing the funds. All of them could be analysed with
the help of following points:
Benefits: It is based upon the assumption of reinvestment which help to generate accurate
results and make right decision for future. It also helps to analyse that the project should be
selected or not by measuring the present value. With the help of it, the entities can determine that
the investment will be beneficial for business or not. Apart from this, it accepts the conventional
cash flow pattern along with time value of money that assures the accuracy of its outcomes.
Drawbacks: The sunk cost is ignored in the calculation of net present value that may
leave negative impact upon the results and make them biased. The financial managers may face
difficulty in determination of the required rate of return while using it that also affects the result
generation procedure (Reher and Sun, 2019).
Payback period: Lovewell Limited is using it to analyse the time period in which the
entity will meet the BEP and when it will be used the managers will also be responsible for
keeping detailed information about all its pros and cons. Discussion of them is covered in
following points:
Benefits: The method of calculating payback period is very simple which helps the
stakeholders to evaluate the effectiveness of project. It facilitates the quick assessment of the
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time which will be take by investment to repay the value of it, which is a measure of risk used to
evaluate projects. It is focused with liquidity of the project so that accurate results could be
generated. The level of reliability of it is very high so it could be used for decision making
purpose.
Drawbacks: The key drawback of this method is that it ignores time value of money
which is one of the key factors required to be focused to evaluate the feasibility of investments.
Apart from this, the cash flow of years after the payback period are also ignored in the
calculation that indicates the possibility of inaccurate results (Renz, 2016).
Accounting rate of return: While evaluating average return on the project various
positive and negative aspects of the method of evaluation are required to be focused. All of them
that are required to be focused by Lovewell Limited could be understood by focusing upon
following points:
Benefits: The main benefit of this technique is that it is very easy to understand because
of the method of computation. It aids the external as well as internal comparisons that facilitate
the decision making. It is very useful in the measurement of divisional managerial performance
that results in effective strategies for future. When it is used for calculation purpose then whole
life of the project is focused so that highly accurate results could be provided.
Drawbacks: The main disadvantage of using ARR is that it does not take the risk for long
term investments and time factor in the consideration in the calculation that may result in weak
outcomes of this method. As its calculations are made on the basis of net profits rather than cash
inflows so the results of it could be manipulated easily by making changes in the method of
applying depreciation (Waxman, 2017).
Internal rate of return: When evaluating the ability of generating profits by the new
machine in which Lovewell Limited will invest its money the managers will be required to take
all the benefits and drawbacks of this method in consideration. All of them are as follows:
Benefits: By using it the managers of the organisation will be able to analyse the actual
rate of return on the actual money which will be invested to buy the new machine. Apart from
this, it can also help to evaluate that the invested money will result in increased firm value or not.
Drawbacks: It could not be used in case of the projects that are mutually exclusive in
nature as it only provides the outcomes that are focused with the feasibility of investment. Apart
from this, if the projects are having different duration then it could not be used (Whiteley, 2017).
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CONCLUSION
From the above project report it ahs been concluded that financial management is one of
the main techniques that are require to be focused by all the organisations as it may result in
effective decision making for future. While planning to enhance the shareholder worth within the
enterprise it will be very important for all the entities to make sure that they use best suitable
option for dividend. Some of them which could be focused by them are cash, scrip divide and
buying shares from the open market. While investing in a new project different types of
techniques of investment appraisal should eb used by the entities. These are payback period,
NPV, ARR and IRR.
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REFERENCES
Books and Journals:
Al Nuaimi, A. and Nobanee, H., 2019. Corporate sustainability reporting and corporate financial
growth. Available at SSRN 3472418.
Aldakhil, A. M., 2016. Effective Financial Management of Supply Chain through the Use of
Emerging Technology. International Journal of Financial Research. 7(1). pp.189-194.
Arofah, A. A., Purwaningsih, Y. and Indriayu, M., 2018. Financial Literacy, Materialism and
Financial Behavior. International Journal of Multicultural and Multireligious
Understanding. 5(4). pp.370-378.
Brooke, M. Z., 2016. Handbook of international financial management. Springer.
Howard, J. P., 2016. Public Financial Management. Syllabus. 5(1).
Lopez, B. S. and Alcaide, A. V., 2020. Blockchain, AI and IoT to Improve Governance,
Financial Management and Control of Crisis: Case Study COVID-19.
Mutiganda, J. C., 2016. Financial management of public services in a hybrid organisation: a
learning approach in inter-organisational settings. International Journal of Public Sector
Performance Management, 2(4), pp.310-330.
Mwangi, P. G., Kiarie, D. M. and Kiai, R. M., 2016. Integrated financial management
information system, procurement performance and customer satisfaction in the county
government of Nyeri.
Reher, M. and Sun, C., 2019. Automated financial management: Diversification and account size
flexibility. Journal of Investment Management. 17(2). pp.1-13.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Waxman, K. T. ed., 2017. Financial and business management for the doctor of nursing
practice. Springer Publishing Company.
Whiteley, J., 2017. Mastering Financial Management. Macmillan International Higher
Education.
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