Financial Management: Valuation Models and Investment Appraisal Techniques

Financial Management
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INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................6
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Financial management is the implementation of business management concepts to a firm's
resources available. Proper control of the finances of a company offers reliable energy and
routine operation to ensure effective running (Antonopoulos and Hall, 2018). If budgets are not
properly addressed, a company may face obstacles that can have significant consequences for its
growth and progress. It is an excellent method for monitoring an organization's financial
operations such as fund acquisition, fund use, billing, transfers, risk management and everything
else relevant to finance. This report based on two different questions that is related to merger or
takeover and investment appraisal techniques.
MAIN BODY
Question 2
Price Earnings Ratio: It is the ratio of the present share price of the company to its earnings
per share. It offers us an understanding of how the consumer is expected to pay for the profits
from the company (Dwiastanti, 2017). It also shows the current value of the stock. Generally
speaking, a high PE ratio indicates market analysts are positive on stock and expect the firm to
show faster growth in earnings going ahead. In certain instances, though, this can also be viewed
as an expensive stock. A low PE ratio may be viewed either as an underrated asset or market
investors are not too optimistic about potential earnings growth for the firm.
Formula:
Price Earnings Ratio of Aztec = Share price / Earnings per Share
= 3.89 / 0.21
= 18.52
Price Earnings Ratio of Trojan Plc = 40.4 / 147
= 27.48
Share price of Trojan Plc = 18.52 * 27.48
= 5.08
Market value = 147 * 5.08
= 746.76
Here it is believed that the market needs Aztec to generate a return on the resources of
Trojan on its own assets equivalent to that.
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Dividend valuation model: It is a way to evaluate the share price of a company based on
the belief that the equity is worthy all the possible dividend payout investment relative to its
interest (Brooke, 2016). That put it differently; shares were used to measure the possible
dividends depending on the capital costs. For dividend calculation, the payout model values for
both g and r are needed, such as:
G = growth rate
R = interest rate
G = (13 / 10) = 1.14 %
Then,
g = 4 √ (13 / 10)
= 1.14%
The cost of equity using CAPM
Ke = 5 + (1.10 * (11 – 5)) = 11.60%
Po = 0.116 – 0.114 = 0.002
Total market value = 147 * 0.002 = 294 million
Discount cash flow method: It is an tool for measuring the worth of an expenditure
based on the projected cash flows (Hoque, 2017). The DCF calculation is seeking to measure the
importance of current investment based on projections of how much revenue it will generate in
the present. It refers both to cash contributions from investors and to company owners willing to
make improvements to their businesses, such as acquiring new equipment.
Discount cash flow method by using WACC of Aztec
Present value of:
Earnings = 40.4 * 1.02 / (0.09 – 0.02)
= 588.68
Assets sale = 21 million / 1.09
= 19.27
Synergy = 5 / 0.09
= 55.56
Total present value of Trojan Plc = 588.68 + 19.27 + 55.56
= 663.51
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