Financial Management: Valuation Techniques and Payback Period

FINANCIAL
MANAGEMENT

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................7
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial management includes the preparation, management, supervision and control
and collection and utilization of the funds of the Company's financial transactions. In this
assessment, we have to address two problems which are focused on acquisition which takeover
and expenditure appraisal strategies (Brusca, Gómez‐villegas and Montesinos, 2016). Finance is
a company's lifeline. Finances, however, are always restricted, as are most other tools. In the
opposite, it still needs to remain infinite. It is therefore necessary for an organization to
effectively control its finances. Within this report, as an introduction to financial management is
mentioned. It includes applying the general management concepts to the financial resources of
the Business. There are many roles used for different purposes such as capital expenditure
forecasts, structure of money, the source of funds, allocation of funds, etc. In addition, second
problem is related to investment appraisal techniques.
Question 2
Price earnings ratio: This is the correlation between the company's share price and the
EPS earnings. It is a growing ratio that gives a clearer understanding of the valuation of the
company. The P / E ratio represents the demands of the consumer and is the price to pay per
current income number. Investors typically like to know before committing the intrinsic interest
of an asset (Banerjee, Duflo, Imbert, Mathew and Pande, 2016). They look at risk, sales, cash
flow and financial reporting from various aspects. One of the most important methods used to
research the inherent value of a product is the P / E ratio and other valuation techniques.
Formula of Price earnings ratio Share price / Earnings per share
Share price £2.05
Earnings per share Net income / Number of share outstanding
Net income £40.4 Million
Number of share outstanding 147
Earnings per share £40.4 million / 147 million = £0.27
Price earnings ratio £2.05 / £0.27 = 7.59

Interpretation- There are various methods using which the valuation of an organization can be
determined. The method of price earnings ratio is a valuation method which helps in analyzing
the ability of an organization to earn from their stocks. From the above calculation, it has been
seen that price of share of Trojan Plc is £2.05 and their earnings per share is computed as £0.27.
By comparing these two values, the price earnings ratio of 7.59 is calculated.
Dividend valuation model: The discount dividend model (DDM) is a system for
determining the market price of the firm, focused on the assumption that the market is worth the
amount of all its possible dividend payments, and is discounted down to its present value. The
Gordon growth model (GGM) is the most common method. It is named after Myron Jz. Gordon
of the Toronto University who published it in 1956 and Eli Shapiro in 1959. Their work was
primarily focused on John Burr Williams' book "the philosophy of investment interest" from
1938. Their study took a heavy toll on scientific and statistical theories of John Burr. The
Dividend Discount Model (DDM) is a way of calculating the purchase price of a company on the
basis that its purchase, relative with its valuation, is worth all of its potential dividend payment
effort. In other terms, shares are used to measure dependent on projected distributions' capital
costs. There are four methods of dividend valuation and one of them is Dividend Discount Model
which is used below to calculate value of Trojan Plc.’s share:
Formula under DDM D1 / (1 + k) + D2 / (1 + k)2 + D3 / (1 + k)3 + D4 / (1 + k)4...
D1 (Dividend for year 1) 10p
D2 (Dividend for year 2) 10.5p
D3 (Dividend for year 3) 11p
D4 (Dividend for year 4) 12p
K (required return rate) 11%
Value of share under
DDM
10p (1 + 11%) + 10.5p (1 + 11%)2 + 11p (1 + 11%)2 + 12p (1 +
11%)2
10 p (0.11) + 10.5p (0.11)2 + 11p (0.11)3 + 12p (0.11)4
11.1 + 10.5 (0.0121) + 11 (0.001331) + 12 (0.000146)
11.1 + 0.127 + 0.014 + 0.00175
£11.24