Corporate Financial Management Report: PGBM142, Semester 1

This report on financial management delves into key concepts such as diversification as a risk management strategy, exploring how portfolios can be structured to mitigate risk and optimize returns. It then examines various methods for company valuation, including the Price/Earnings (P/E) ratio, dividend valuation models, and the discounted cash flow (DCF) method, detailing their key drivers and applications. The report also assesses investment appraisal techniques, such as the payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR), evaluating their effectiveness in determining the feasibility of investment projects. The report provides calculations and interpretations for each technique, offering a comprehensive overview of financial management principles and their practical application in corporate decision-making. The report is divided into sections, with Task 1 focusing on diversification, Task 2 on company valuation, and Task 3 on investment appraisal techniques. The report utilizes models and formulas to analyze financial data and make informed recommendations.

Financial Management

Contents
Introduction.................................................................................................................................................3
Part B...........................................................................................................................................................3
Task 1......................................................................................................................................................3
Diversification.....................................................................................................................................3
Task 2......................................................................................................................................................5
Valuation of a company.......................................................................................................................5
Key drivers of valuation models........................................................................................................10
Task 3....................................................................................................................................................12
Investment appraisal techniques........................................................................................................12
Evaluation of investment appraisal techniques..................................................................................15
Conclusion.................................................................................................................................................19
REFERENCES..........................................................................................................................................20

Introduction
Each investor wishes to optimize benefit and minimize risk. Both investments include a return-
compensated risk factor. More chance is the return, as the expression goes. Therefore, an
investor has to take more chances in order to get more income (Shapiro and Hanouna, 2019). The
diversification of the portfolio with various instruments with various costs and returns is yet
another way to minimize risk. In the first section, an investor explores how both risk and income
should be managed. In the second part of the appraisal of a organization, various approaches are
used. The investment valuation strategies for deeper comprehension are seen in the final section
of the report.
Part B
Task 1
Diversification
Diversity is a risk control strategy. An investment is converted into a broad number of financial
tools in a system in order to minimize risk for any particular vessel of investing. Another
concept behind this strategy is that a multiple-asset portfolio will produce larger long-term
rewards whereas reducing the risk associated with single assets, i.e. the gains from good
investing will compensate for the loss incurred by other investments' bad results. Bonds and
stocks, for example, are normally mutually incompatible (Apte and Kapshe, 2020). If the
economy weakens, it is possible that asset prices will crash. Central banks cut interest rates in
order to save economies in this situation to lower borrowing costs and to raise market expenses.
This adds to a rise in bond yields. If an investor owns portfolio securities and stocks, the increase
in bond value could compensate for a decrease in stock valuation. And the burden was at least
decreased even though revenues were not raised.
Investors of any capital asset not only make gains, but also risk, the most critical aspect of the
decision-making process as they chose to expand. Risks are the risk of a real investment return
being different from the theoretical return. Each investment entails a risk and each investor has a
particular risk tolerance. Two examples of payment risk are structural hazards and unspecific

hazards. Systematic value is also referred as market risk as it macro-effects certain threats.
Popular categories of structural risks include interest rate risks, inflation, market liquidity, etc.
Unsystematically, the threats in these groups often impact particular sectors or businesses.
Changes in ownership, retrieval of goods, new major business players, etc. Both are common and
challenging to diversify systemic threats. The challenge of investors controlling by expanding
their investments is unbundling. Each expenditure entails a risk and each shareholder has a
particular risk tolerance. Two examples of payment risk are structural hazards and unspecific
hazards. Systematic value is also referred as market risk as it macro-effects certain threats.
Popular category of structural risks includes interest rate risks, inflation, market liquidity, etc.
Unsystematically, the threats in these groups often impact particular sectors or businesses.
Changes in ownership, retrieval of goods, new major business players etc. Both are common and
challenging to diversify systemic threats. The challenge of investors controlling by expanding
their investments is unbundling. The equity investors pre-estimate these returns without spending
elsewhere in their capital. In these equations, certain profitability statements help (Mitchell and
Calabrese, 2019). It helps to define the relationship between profits per share and the market
price per share, for instance, of earnings return. The P / E ratio remains the same. It's a nice
return on the metric of investment. Shareholder preparation is performed in many ways to
maintain a diversified portfolio to reduce the risk to compensate risks for future gains. Any of
them are stated below:
• First of all, in contrast to projected returns, investors will define their risk appetite. Their
Portfolio can then be expanded to various investment resources including currency, stocks,
shares, reciprocal fund funds, ETFs, Gold, etc.
• Diversification must also be followed across of form of capital channel. For instance, securities
vary according to sector, market cap, area, revenue, valuation, growth, etc.
• Aim to define and include risk-factor-vitiating securities that pose threats to each other. Only
other thing to note is that diversifying is not a single process. Investors must periodically track
their investment results and modify their shares in compliance with their priorities and
objectives.

Task 2
Valuation of a company
It is a method to measure the economic worth of an entire organization or unit of operation.
Many elements, such as layout and profits – current and future expectations, trading price, etc.,
are evaluated before valuation is allocation to the company (Al Breiki and Nobanee, 2019).
Many evaluation estimation techniques exist. For starters, the analytical discounted cash flow
(DCF), the Capital Asset Pricing Model (CAPM), the DDM, etc.
1. Calculation of value of Espirit PLC using following method:
Price/Earnings (P/E) Ratio – This is a ratio used to calculate a company's worth in
comparison to the earnings per share of the present share price (Naranjee, Ngxongo and
Sibiya, 2019). It allows seeing whether a business is underrated or overestimated. The
price earnings ratio, also recognized as P / E ratio, P / E ratio or PER, is the ratio between
the corporate share price and the corporation's per share earnings. The measure is used to
evaluate businesses and to decide whether they are overestimated or underestimated.
P/E Ratio = Market value per share price/ Earnings per share

(b) Dividend valuation method: That is a statistical way to calculate the company's worth based
on the prediction that all potential distributions will be identical to the existing stock values if
they are reduced to their real value (Yuniningsih, Pertiwi and Purwanto, 2019). If the valuation
reached is greater than the actual share market price, the inventory is underappreciated and vice
versa. The model of dividends discount is a way to measure the equity of a company, on the
basis that its equity is simply the value of all possible dividend payments, which have been
reduced to present value. This implies that securities are priced on the basis of the actual net
worth of potential dividends. The assessment of Espirit PLC is as follows: Adopting Gordon's
market structure:
V0 = D1/ (r-g)

(c) Discounted Cash flow (DCF) method: It is an evaluation approach utilizing discounting
strategies. The estimation of its potential cash flows aims to forecast worth. It aims to assess
today the worth of an asset or expenditure on the basis of potential money predictions. Since it is
dependent on possible predictions and assumptions, it may be misleading (Davidova and
Latruffe, 2020). In financing, a discounted cash flow analysis is a way to determine the time
value of a security, operation, firm or asset. DCF method is normally used in raising capital,
production of real estate, business finance and patent appraisal. A discounted cash flow
assessment can be measured as follows:

Key drivers of valuation models
Price / Earnings Ratio – Price / Earnings Ratio – Performance revenue, common shares, and
business dynamics represent the key factor of P / E ratio. In above-mentioned elements are
influenced by several variables like cash flows, corporate size, share price size, governmental
policies, industry performance, growth , asset returns, sector leadership and earnings stability.
Financial planners shall search for higher income mixture of cost controls and revenue rise. They
will also discuss new products and business prospects. They also track stock market performance
closely. The stock market is unpredictable and actively reacts to all big shifts regardless of
whether management announces unforeseen profit / loss, or future company success or hazard.
Enterprises with a credibility as industry champions and creative efficiency solutions enjoy better
Market P / E ratios; buyers are able to afford premium rates for the shares of those enterprises
(Rendon and Snider, 2019). The financial managers shall also take into account general
economic factors, such as interest rates, running expense, unemployment numbers, etc. It does
not only have an effect on wages, but also on capital market values.

Dividend Valuation method: Dividend, earnings growth rates and the corporation's cost of
capital are the major elements of this formula. Variables like cash flows on a daily basis,
retention plans and share price, the dividend payout strategy, cash flow period, equity and debt
rate, potential risk and so on are guided by these elements. The model of dividends discount is a
way to measure the equity of a company, on the basis that its equity is worth the amount of all
possible dividend payments, which have been reduced to present value. This implies that
securities are priced on the basis of the actual net worth of potential dividends.
The financial managers should bear in mind, when assessing an assessment of a business or
investment, that in this model, there are three main factors: dividend yield (DPS), DPS growth
and the target rate of interest. Cash flows should be tracked to ensure continuity among
managers. Capital funding arrangement is the internal management choice such that management
can explore all potential investment choices before selecting one in order to ensure that the
businesses have the lowest expense. Investors can expect a continuous growth rate in business
dividend distributions which are consistent with the payout and retention policies of the
company. The duty of managers is to balance between two. Based on past records and projected
predictions the worth of capital is taken for granted, but in future it is unknown. Thus, allowance
is made on a risk-based basis.
Discounted cash flow method: This methodology is focused solely on potential predictions. It is
also only as precise as the theories. Any prediction is based on main valuation drivers such as
free cash flow forecasting, total costs as underestimating factor, expected cash growth rate,
forecast length, etc.
Cash flows play a significant role and can be stated for this approach to be definitive. The
priority of financial managers is therefore of course on ensuring consistent cash flows. In order
to achieve a better value for the company, they will often perform acts aimed at increasing
revenue, reducing prices, payment mechanisms and debtor requirements, etc. Capital costs are
used as a factor to mitigate costs and thus attempts are often taken to reduce cash position and
debt and equity costs in the financial department schedule (Cangiano and Goodwin-Groen,
2019). At end of the review period, the growth rate in the marginal price represents cash flow
growth. There are therefore attempts to refine it. Another critical aspect that influences duration
of the prediction period, rather than working capital and the dividend yield. Lengthening or

shortening time may have a direct influence on the organization’s valuation and performance. It
should then be assumed to use the time according to the company's necessity.
Task 3
Investment appraisal techniques
a. The Pay Back period:

Brief description: The duration of recovery represents the time needed to reach the investment
back. In reality, this time is 3.7 months that implies that in this period the company will regain its
original cost of £740000.
b. Accounting rate of return: =Annual profits/ Initial investment

ARR is a methodology composed of the contribution or other asset rate of income. This is
measured on the basis of the original project expense. The yield is 83.12%, which results in a
return equivalent to the estimated return for the venture.
c. Net present value: Net cash inflow- net cash out flow
In the given case, NPV = net cash inflow- net cash outflow
= 828839.1624– 740000
= £ 88839.16
It is an investment appraisal technique used to assess the feasibility of a given project. In this
case, after all cash outflows and inflows have taken account, the NPV is measured and is
£88839.16. The viability of the venture is this number.
d. Internal rate of return:

A variety of approaches may be used to assess how often an organization plans to replace a new
project. IRR is the easiest way to calculate a new project's anticipated return. The estimated
return rate of the planned project is 9.59 per cent in the specified scenario.
Evaluation of investment appraisal techniques
A company has planned to acquire different strategies for commercially feasible study of the
planned project. All strategies have such benefits and drawbacks that are discussed as follows:
1. Pay Back period: This is the easiest way to calculate a project's viability. The time in which
the original expenditure is returned is ultimately determined. The time taken to regain the
expense of expenditure is alluded to as the repayment method. Just to put it plainly, the moment
the expenditure hits a breakpoint is the payback duration (Uña, Allen and Botton, 2019).
Investment portfolio attractiveness is specifically correlated with the payback time. More
appealing savings are made with faster paybacks. While it is helpful to measure the payback time
in financial and capital budgeting, it applies in other sectors. The return on energy-efficient

technologies like solar and isolation panels, including repair and updating can be measured by
households and companies.
There are also some advantages and drawbacks listed below:
Advantages of Pay Back period: It is the easiest means of measuring a project's economic
viability. This is an simple means of comparing for the business the payback time of multiple
options. There are still several inconveniences in the payback cycle.
Disadvantages of Pay Back period: The approach does not think the time value of money as the
most critical constraint. This means that in later time (for instance after 5 years), the worth of my
unit of money is now as high as it is. Because of this constraint, a proposal loses the certainty of
its feasibility. This research device takes into account flows, which does not incorporate the
inflows that accumulate during the time before the original expenditure has been restored. To
assess the real feasibility of the plant, it is important to consider each cent of inflows. Often at
the beginning of the cycle a project has smaller returns but significant returns in the latter. This
inequality in cash flows will lead to a high incentive period which is obviously not the case and
reflects decreased viability of the project.
2. Accounting rate of return: It is the parameter of capital budgeting which is useful if
expenditure productivity is the object of estimation. ARR is effectively an instrument for
assessing different projects in order to measure each project's projected return. This method helps
managers determine whether to make expenditure or to buy. The accounting rate of return (ARR)
is a format that represents, in conjunction with the original investing expense, the estimated rate
of return anticipated on an investment relative. In order to obtain the ratio or return which can be
projected over the lifespan of a property or associated ventures, the ARR formula splits a
medium asset sale into the initial investment of the business. The time value of capital or cash
flows that may constitute an inherent component of an organization cannot be taken into account
by ARR (Saputra, Jayawarsa and Atmadja,, 2019). The rate of return on accounting is a capital
budgeting measure helpful if you want to easily determine the feasibility of expenditure.
Companies use ARR mainly for evaluating several projects to assess or for determining an
expenditure or transaction the estimated cost of return of any project. Variables of the ARR in all
potential annual fees incurred with the enterprise, like depletion. Devaluation is a good financial

agreement in which the value of a capital asset is distributed over the usable life of the asset, or is
expensed, quarterly. This ensures that even during the first year of operation the organization
will benefit from the asset immediately.
Advantages of Accounting rate of return: Computing is really simple and easy to learn and apply
under this technique. Complete revenues are therefore taken into account over the whole
economic life of the plant. It takes into account the principle of net profit, i.e. profit resulting
from tax deduction and depreciation. Assessing the feasibility of the project or initiative planned
is a critical consideration. This approach provides a straightforward picture of the project’s
feasibility. This instrument is incredibly useful for assessing the company's current results.
Disadvantages of Accounting rate of return: The outcome variance is determined by various
methods such as ROI and ARR. The decision-making process generates a barrier. The definition
of a time quality and value is often neglected in this system, with unclear consequences. This
approach often lacks the external aspect that can have a dramatic effect on the project’s viability.
In situations where investments have to be made in pieces, this approach is not sufficient. The
time span of the investment is not taken into account, so the total investment will remain stable.
3. Net present value: It is also the indicator of a project’s viability. It shows that the variance
between the project inputs and outflows is determined. This strategy aims to compare multiple
available choices so that the better can be chosen. Increased the NPV, increased project viability.
In case multiple alternatives are open, this is an efficient tool. The net current (NPV) value is the
contrast among the capital inflows' current and the capital outflows' current value for a time.
NPV is being used to assess the feasibility of a planned venture or initiative in terms of return on
equity. A net present value method means that, in monetary terms as well, the forecasted profits
estimated cash or expenditure outweighs the planned costs (BAKAR and BAKAR, 2020).
Expenditure with such a higher NPV is supposed to be successful and expenditure with a
negative NPV is expected to cause a net loss. This really is the basis of the Net Present Value
Rule, which needs attention to be extended only to transactions with higher NPV values.
Advantages of Net present value method: This approach is a very valuable technique for
management because it takes into account different important considerations such as money's
time, traditional cash flows and tax rates as well. These procedures takes not only little cash flow

into account, but also takes into account each penny to deliver consistent results. This approach
is not only helpful in case of contrast but also assists in determining whether or not there is
uncertainty about the planned project.
Disadvantages of Net present value method: NPV is a very difficult approach for estimating
because it requires time value into consideration; thus, it is hard to measure cash flows at present
value. This approach becomes redundant if mutually exclusive ventures are not equal in
numbers. The required discount rate is very difficult to determine. This approach is not even
beneficial for alternatives with various useful lives
4. Internal rate of return: The growth rate is currently supposed to be produced annually in the
project proposal. The average growth rate is comparable to the compounded. The internal return
rate is a measure of the ratability of capital growth to be measured in financial assessments. The
inner rendering rate is the discount rate which in a profit and loss study equates net present value
(NPV) for all retained earnings to nil. The method used for computing the IRR is just the same as
NPV. The NPV is equivalent to 0 and the dividend yield that is the IRR will be solved to
measure the IRR using this same calculation (Yang and Shi, 2019). Even so, owing to the
existence of the calculation, IRR cannot be analyzed and the results and could instead be
determined either using experimentation or IRR computational applications. In general, the
higher the IRR, the better and expenditure is. IRR is consistent with different types of funds and
therefore IRR could be used for a comparatively equivalent rating of several potential
investments and ventures. In general, the portfolio with the highest IRR is likely deemed the best
when contrasting investing alternatives with equivalent other features.
Advantages of IRR: Several of the main benefits of this procedure are that the investment plan
takes into account the importance of time of capital and thus provides a strong profitability
outcome. It is very straightforward to understand, since if an IRR exceeds operating costs more
than implies that the proposal is cost-effective, otherwise it would not be possible in the reverse
situation. Hurdle rate calculation is a tedious process, but this rate does not need to be measured
with an IRR and it can also be quickly calculated.
Disadvantage of Internal rate of return: It lacks economy of scale, the biggest weakness of this
system. The conclusions taken in accordance with this methodology are often sometimes not

possible, meaning that the findings are worthless. In situation of dependent projects, this
approach is not effective, since IRRs can be high in a specific project but the conditional project
can remove the gain. In the case of contingent projects, however, there is no obvious value. This
method is therefore not useful if solutions are not of the same useful existence (Haydarov, 2020).
The above assessment concludes that the IRR director is the better process, as it is in the present
case, is really just IRR.
Conclusion
It can be inferred from the above study that investment requires considerable spending on
resources, with risks and uncertainty in the future. Investors are advised to broaden their horizons
so that one investing channel struggles to prevent losses. At the group's point, financial analysts
conduct several techniques before engaging in other businesses or ventures to determine the
effectiveness and effectiveness of a project and minimize as much ambiguity as practicable.

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