Financial Management Assessment Report: Equity & Investment Appraisal

This report delves into key aspects of financial management, focusing on equity finance and investment appraisal techniques. It begins by examining right issues, calculating the number of shares issued and the ex-right price, and critically evaluating the advantages of scrip dividends for both shareholders and corporations. The main body of the report then explores investment appraisal techniques, including payback period, accounting rate of return (ARR), and net present value (NPV), providing detailed calculations and a critical evaluation of their advantages and disadvantages. The report uses Love-well Limited as a case study for applying these techniques. The analysis includes specific calculations for each method, such as determining the payback period, calculating ARR, and computing the NPV to assess the viability of an investment in new machinery. The conclusion summarizes the findings and recommendations based on the analysis.

Financial
Management
Assessment

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Question 2. Long term finance: Equity finance...............................................................................3
Number of the shares issued and ex-right price:.........................................................................3
Critically evaluating and discussion on advantages of scrip dividends in context of
shareholders and corporation:.....................................................................................................5
MAIN BODY...................................................................................................................................7
Question 3. Investment Appraisal Techniques................................................................................7
(a). Calculate by using following investment appraisal techniques............................................8
(b). Critically evaluate the advantages or disadvantages of different investment appraisal
techniques..................................................................................................................................12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial management implies to systematic and effective process relates to plan,
direction, regulate and manage fiscal functions such as collection, generation and utilisation of
multiple sources funds within enterprise. In simple terms this is structured usage of policies and
principles farmed by managing officials to to manage organisation's financial resources (Arianti,
2018). This study-report focuses on different characteristics and elements of financial
management which enable to find-out most efficacious right-issue for corporation and equity
option. It also discuss about advantages of option of scrip dividends with respect to corporation
as well as shareholders. This study-report highlighting calculations of no. of shares to be issued
by corporation Lexbel and EPS for showing most suited options concerned with right issues.
While later part of report evaluates benefits and drawbacks of multiple investment-appraisal
techniques.
TASK
Question 2. Long term finance: Equity finance
Number of the shares issued and ex-right price:
Right Issue: Term rights issue relates to manner though which a corporation can increase share
capital by issuing additional shares. Here notable aspect is in right issue is that rather than
issuing shares to general public corporation offers its current/existing shareholders a specific
right to get freshly issued shares/securities in pro-rata manner (Banerjee and et.al., 2016).
Curr
ent
mare
t
price
Right issue price £1.90 £1.80 £1.60 £1.40
Funds to be issued
£180,
000
£180,0
00
£180,00
0
£180,00
0
New shares to be issued (Funds
to be issued/Right issue price) 94,73 100,00 112,500 128,571

7 0
Book value of ordinary shares
of £0.50
£300
,000
Numbers of shares
(Ordinary shares/price)
600,0
00
Current market value of the shares
(Number of shares*Current market
price)
£1,14
0,000
Funds raised through right
issus
£180,
000
Final value market
(Current market + Funds to be issued)
£
1,320,
000
Total new shares after right issue
( New shares issued+Number of shares)
694,7
37
700,00
0 712,500 728,571
Reserves shares
£
400,
000
Total value of the company
(Book value of shares+rezerved)
£
700,
000
Profit after tax (PAT)
(Value of the company*20%)
£
140,
000
Earning from new funds (20%)
(Funds to be issue*20%)
£
36,0
00
Total earnings after right issue
£
176,
000

Theoretical ex-right price (TERP)
(Final value market/Total new shares
after right issue) 1.90 1.89 1.85 1.81
New earning per shares
(Total earning after right issue/Total new
shares aftre right issue)
0.25(
25p)
0.25(25
p)
0.25(25
p)
0.24(24
p)
Form of the issue for right
issue price
{(1/New shares to be
issue)*Numbers of shares }
6.00 5.33 4.67
Issue of
1 for 6
right
shares
held
Issue of
9 for 48
right
shares
held
Issue of
3 for 14
right
shares
held
This has been noted from above findings that third alternative is viewed as the better for
both the shareholders and corporation. Shareholders may enhance their aggregate exposure at
these discounted values and can achieve significant portion of shares which will provide return in
future. While on another side, corporation can achieve expansion though issue of shares and
securities. Corporation should opt for above third alternative in which price of issuance right
shares correspond to pound 1.40. Such alternative is most suitable as compare to other as
shareholders will get more securities at cheaper price and company will issue 3 shares against 14
right-shares held by shareholders.
Critically evaluating and discussion on advantages of scrip dividends in context of shareholders
and corporation:
Scrip dividend term implies to fresh issuance of share by corporation to its shareholders,
instead of distributing dividends. Scrip dividends are generally considered when company wants
to expand their an net worth and also to maintain their cash holdings but corporation wants to
pay dividends to its shareholders (Brusca, Gómez‐villegas and Montesinos, 2016). This kind of
dividends act as effective alternative of ordinary cash dividend as here in scrip it offers shares

option along with cash dividend. Scrip dividends also defined as efficient process of enabling
shareholders with alternative of getting cash dividends or sum of dividend at any future-period.
Scrip dividend, often recognized as liability dividend, being provided by the Corporation to
shareholders in the forms of a certificates rather than an ordinary cash dividend and offers its
shareholders with the option of collecting dividends at later point time or may receive shares
rather than dividends. Industries give such dividends if they don't have enough money to pay-out
as dividends. Scrip Dividends are normally paid by the enterprise in a circumstances in which the
it wishes to issue dividends but the organisation doesn't have adequate cash/monies or liquid
funds to pay-out dividends or it wants to invest available cash-funds towards company's growth,
capital spending/costs or any other specific purposes. However at same point that provides the
bad signal about stock to the investors because shareholder doesn't want to buy stock as they
don't receive cash dividend since they believe their wealth gets diverted and financial condition
of the firm is not really nice and it has cash crunches (Engel and et.al., 2016).
Benefits:
For shareholders-
 This kind of dividend offers strength in shareholders and securities holders in corporation
with holding position as well as their voting rights.
 Option of shareholding under scrip dividend enables shareholders to enhance their
shareholding with any additional costs.
 Selecting of share option at any future date can lead to more yield and profits as compare
to ordinary dividend option on shares.
 It advantageous in terms of tax saving because opting for shares option can lead to tax
advantages.
 By selling shares obtained in scrip dividend can result in greater profits in comparison to
benefits value of ordinary cash-dividend (Ferguson and Morton-Huddleston, 2016).
For company-
 The very first and foremost benefit of scrip dividend is that corporation can save and
maintain cash funds which are available.
 Excessive and instant cash out flow due to distribution of dividends can lead to negative
or adverse liquidity position within entity so avoid such adverse circumstance scrip
dividend is most beneficial option.

 Corporation can save significant amount of dividend distribution taxes and expenses, also
shares options under it not lead to heavy share-issue expenses.
 Also a company can enhance their capital and net-worth by retaining same cash level and
in quickly manner (Mitchell and Calabrese, 2019).
Drawbacks:
For shareholders-
 Major and considerable drawback of a scrip-divided is that shares option herein
dependent upon corporation's future performance which is unpredictable for normal
shareholders. Thus shares price there might be risk of drop in shares price of entity.
 Some times proportion of share issue under scrip-divided is not as per expectations of
shareholders.
 For shareholders who have selected option of cash-dividend there may be additional tax
liabilities.
 In case majority of shareholders/securities holders opting for cash dividend then share
option generally not provide so much benefits due to lower dividend (Muneer, Ahmad
and Ali, 2017).
For company-
 Major drawback here for a company is that issuance of shares can lead to distribution of
ownership and business-control.
 In normal cases, a company only issues scrip dividend when it is facing and struggling
with cash issues, negative cash-flows or other liquidity issues, so this can lead to negative
image of entity in industry.
 Another considerable disadvantage of it is that most of the shareholders after opting
shares option sold out all or significant amount of shares which can often lead to decline
in overall net-worth of corporation (Munge, Kimani and Ngugi, 2016).
So as per above discussion, this has clear that corporation should consider all discussed
advantages and drawbacks carefully before selecting scrip dividend. Further, shareholders should
also determine the viability of scrip dividend options based on above explained benefits and
disadvantages.

MAIN BODY
Question 3. Investment Appraisal Techniques
Investment appraisal techniques include various methods which is used by the
organizations to evaluate attractiveness of any investment. Most of the businesses adopt these
techniques and measure that how beneficial as well as profitable it is. Payback period, internal
rate of return (IRR), net present value (NPV), accounting rate of return etc. These methods helps
in analysing single project and after that managers will select the most suitable one. Purpose of
this technique is to find out feasibility and quality of project and after that make decisions
regarding further investment (Nkundabanyanga and et.al., 2017). Managers of Love-well limited
follow this technique to identify that investment is beneficial or profitable for company or not.
Also recommend that company should in this or not and its further calculation mentioned below:
(a). Calculate by using following investment appraisal techniques
Payback Period:
In capital budgeting, payback period is a method which is used organizations to identify
that in how many times company can recover their initial cost. Low payback period is selected
because it is beneficial as well as profitable for Love-well and it helps in identifying that they
should purchase in new machinery or not (Siekelova and et.al., 2017). Its formula or calculations
are as follow:
Formula:
Payback Period = Initial Investment / Actual Cash Inflow
Calculations:
Actual inflow of cash = 85000 – 12500
= 72500
Initial Investment = 275000
Pay back period = 275000 / 72500
= 3.79 years
Above results indicate that payback period of this investment is 3.79 years, it means
Love-well limited recover their initial investments within 4 years. Life of machinery is six years
and business recover in four years, so it is beneficial as well as profitable for the organizations to
invest in this project.

Accounting Rate of Return:
ARR is an financial ratio which is used in capital budgeting where time value of money
does not consider. It is one of the important aspect which helps managers to analyse that how
attractive project it is. High returns of project is beneficial as well as profitable for organizations.
This appraisal techniques followed by Love-well Limed to evaluate that, they should invest in it
or not. Its calculations are as follow:
Formula:
ARR = Average profit / Total outflow of funds * 100
Calculations:
Years 1 2 3 4 5 6
Inflows 85,000 85,000 85,000 85,000 85,000 85,000
Less: outflows 12,500 12,500 12,500 12,500 12,500 12,500
Profit after
depreciation
72,500 72,500 72,500 72,500 72,500 72,500
Less: Depreciations 38,958 38,958 38,958 38,958 38,958 38,958
Profit before
depreciation.
33,542 33,542 33,542 33,542 33,542 33,542
Average profit = Total profit / 6
= (33542 + 33542+33542+33542+33542+33542) / 6
= 33,542
ARR = 33,542 / 275,000 * 100
= 0.1220 *100
= 12.20 %
Above calculation represent that ARR of this investment is 12.19 % which is acquire by
Love-well Limited after purchasing this machinery. Return is quite good within six years, so
company should purchase machinery to maximise their earnings or get high returns.
Working Notes:
Depreciation = Cost of assets – Scrap value / Life of machinery

Particulars Amount
Cost of machine 275000
Less- Scrap value (15% of cost of machine) 41250
233750
Each year depreciation (23,3750 / 6) 33958.33
Net Present Value:
It is another method of investment appraisal technique which is calculated by using
difference of present value of cash inflow or present value of cash outflow. NPV used in capital
budgeting for investment planning and analyse profitability of projects. This method used by
managers of Love-Well Limited and analyse that they should purchase new machinery or not. Its
calculations are as follow:
Formula:
NPV = Total cash inflow - Total outflow
Calculations:
Years Inflows Present value factor
12%
Present value
1 £ 72,500 0.89 £ 64525
2 £ 72,500 0.80 £ 58000
3 £ 72,500 0.71 £ 51475
4 £ 72,500 0.64 £ 46400
5 £ 72,500 0.57 £ 41325
6 £ 72,500 0.51 £ 36975
Residual value at the
end
£ 41,250 0.51 £ 20138
Total present value £ 318838

NPV = 318838- 275000
= 43,838
Based on above calculation, it has been observed that NPV of machinery is positive that
is £ 43,838 that is beneficial for Love-well company. If NPV of machinery is negative than
proposal will going to reject because it is not beneficial for business to invest.
Internal Rate Return:
IRR is an discounted technique of cash flow which provide rate of return on single
project. Organizations use this method to identify that which project provides more return
because high IRR will be selected among all. Managers of Love-well follow this method to
evaluate that purchase of new machinery is profitable or not. Its formula or calculations
mentioned below:
Formula:
IRR = Lower discount rate + present value of lower discount rate – total outflows of
funds / present value of higher discount rate – present value of lower discount rate (higher
discount rate – lower discount rate)
Calculations:
IRR calculated by using hit & trial method where discounted rate is for machinery are
14% & 18%.
Period Inflows PV @ 14% Cash Flow PV @ 18% Cash Flow
1 £ 72500 0.88 £ 63800 0.85 £ 61625
2 £ 72500 0.77 £ 55825 0.72 £ 52200
3 £ 72500 0.68 £ 49300 0.61 £ 44225
4 £ 72500 0.61 £ 44225 0.52 £ 37700
5 £ 72500 0.54 £ 39150 0.44 £ 31900
6 £ 72500 0.48 £ 34800 0.37 £ 26825
Residual value
at the end £ 41250 0.48 £ 19800 0.37 £ 15263

Total present value £ 306900 £ 269738
NPV £ 31900 -5262
NPV @ 14% = 31900
NPV @ 18% = −5262
IRR = 14 + 31900 / 31900 - (−5262) * (18-14)
= 14 + { 31900 / 37162 } * 4
= 17.43 %.
Above result shows that IRR of machinery is 17.43% which is goods, so company should
invest in this project because it is beneficial as well as profitable for Love-well Limited. Higher
the IRR will leads to generate high profit for business.
(b). Critically evaluate the advantages or disadvantages of different investment appraisal
techniques
Payback period:
Advantage: It is on of the most simple method in capital budgeting which is used to
evaluate investment and analyse that it is beneficial as well as profitable for the organization or
not. Payback period help the managers to make investment related decisions because lower
recovery time is most effective and company will select that project which has low payback
period.
Disadvantage: It will reject negative NPV because it is not suitable for business or not
generate any profit. It does not consider time value of money of if any two project have same
recovery time than they need to evaluate overall cash flow in minimum time (Siminica, Motoi
and Dumitru, 2017).
Net Present Value (NPV):
Advantage: It is probably the best method which is followed by companies to evaluate
their project and analyse that which one is better to invest. In addition, it consider time value of
money as well as opportunity cost in the business. It further helps in decision making process
which is taken by managers at the time of selecting suitable project.
Disadvantage: NPV can compare with other projects but only when initial investment is
same. Otherwise company unable to compare because they does not have same base to compare

results. Negative NPV rejected because it dies not generate any profit for business and not
feasible to investment.
Internal Rate of Return (IRR):
Advantage: This method of investment appraisal beneficial for the managers to make
decision faster as well as make it simple to select one from multiple options. Higher returns will
be selected in comparison to lower return of any investment.
Disadvantage: In this technique, economies of scale ignored which affect overall
outcomes which can vary from actual results. It does not make any different between borrowings
or lending. Every projects can have multiple IRR which influence overall decision of managers
(Tang and Baker, 2016).
Accounting Rate of Return (ARR):
Advantage: It is very simple to calculate and mangers can easily make decisions through
evaluating result. With the help of ARR, management able to identify profitability of project and
how further it will provide benefits to the business. This method consider accounting value
which is often used by managers.
Disadvantage: This method ignore cash flow of project because it is based on accounting
profit. It may also impact accounting practices which followed by organizations to maintain their
accounts. ARR also ignore time value of money which affect overall results of investment
(Yulihantini and Wardayati., 2017).
CONCLUSION
From the above discussion, it has been concluded that financial management is essential
aspect where managers evaluate each process or maintain availability of resources. Company
acquire financial resources from various sources such as equity, bonds, preference etc. In
addition, business use cost of capital to identify opportunity cost. Along with this, by using
investment appraisal techniques managers evaluate that company should invest in this project or
not. As per the given result, management decided to purchase machinery on the basis of payback
period, IRR, NPV or ARR. Investment evaluation technique allows to make an effective project
evaluation and also specifies the profits generated by selecting the project/venture in question. It
is believed that techniques of project management are of great significance to businesses.

REFERENCES
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