Financial Management: Issuing Right Shares and Investment Appraisal Techniques

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
OUESTION 2...................................................................................................................................1
a. & b. Issuing right share and Determination of different values...............................................1
c. Critical discussion of advantages of scrip dividend from the point of view of the enterprise
and shareholders...........................................................................................................................5
QUESTION 3...................................................................................................................................6
a. Use of different investment appraisal techniques for calculations...........................................6
b. Critical evaluation of all the investment appraisal techniques by discussing all their benefits
and limitations............................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management can be defined as the process of planning and controlling the
finance related operations so that performance of whole organisation could be improved. Main
purpose of it is to apply management principles on funds of the enterprise for proper execution of
operations (Antonopoulos and Hall, 2015). This report is based upon usage of different
investment appraisal techniques and issuance of right shares within the organisation. For the
completion of this project question 2 and 3 are selected. This assignment covers various topics
such as scrip dividend, right shares etc. Additionally, NPV, ARR, IRR and pay back period are
also covered in this report.
OUESTION 2
a. & b. Issuing right share and Determination of different values
Most of the business entities may have to face the problem of lack of capital for the
purpose of performing operational activities. Additionally, some times insufficient working
capital related challenges may also dealt by business enterprises. For the purpose of dealing with
all of them in systematic manner it is very important for top level executives of organisations to
arrange funding to carry out operations. They can introduce fresh capital for business and launch
new shares in the market. One of the technique which is used by most of the companies to
improve cash position and enhance shareholder's equity is allowing scrip dividend to the
shareholders (Banerjee, 2015). By selecting this option a company and the individuals having
share in it get benefited because the business can enhance retained earning and the external
parties can increase their ownership in the entity. The shares which are issued against dividend to
the existing shareholders are known as right shares.
The Board members of Lexbel Plc have decided to raise 180000 pounds by issuing right
shares so that its operations could be expanded. The suggested price for them by the board are
1.80, 1.60 and 1.40. The market price for the existing shares is 1.90. Calculations for
identification of best options are as follows:
Provided information:
Particulars Details
Ordinary shares @ 50 300000
1

Reserves 400000
Total equities 700000
Calculation of number of shares which are going to be issued:
Particulars
Option 1 Option 2 Option 3
A Total existing shares of Lexbel 600000 600000 600000
B Money which is required to be raised by the
company by issuing right shares
180000 180000 180000
C Suggested price of Shares by Board 1.80 1.60 1.40
D Total number of shares which are going to be
issued [B / C]
100000 112500 128571
Determination of Theoretical ex-rights price:
Particulars Option 1 Option 2 Option 3
The suggested price of right issues by board 1.80 1.60 1.40
Money which is required to be raised by the
company by issuing right shares
180000 180000 180000
Total number of shares which are going to be
issued
100000 112500 128571
Total value of the company before issuing the
right shares (600000*1.90)
1140000 1140000 1140000
Total value of the enterprise after issuing the
right shares [(600000 * 1.90) + 180000]
1320000 1320000 1320000
Total theoretical Ex- right price of each
share
1.89 1.85 1.81
Working notes:
Calculation of total theoretical Ex- right price of each share:
Formula: Total value of enterprise after issuing the right shares / Total number of shares
including the right shares to be issued
Particulars Option 1 Option 2 Option 3
2