Financial Management Report: Exercise 2 and 3 Analysis

This report provides a comprehensive analysis of key financial management concepts, focusing on scrip dividends and investment appraisal techniques. The report begins with an introduction to financial management, emphasizing its importance in analyzing a business's financial position. The report then delves into a discussion of scrip dividends, exploring their advantages for both companies and shareholders, such as increased retained earnings, enhanced equity capital, and potential tax benefits. The second part of the report critically evaluates various investment appraisal techniques, including the payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR). Each technique is described, and its benefits and limitations are thoroughly examined, providing a balanced perspective on their practical application in financial decision-making. The report concludes by summarizing the key findings, highlighting the significance of financial management in achieving long-term business goals and the importance of selecting appropriate investment appraisal techniques. The report uses examples from companies like Lexbel and Lovewell Limited, enhancing the practical relevance of the concepts discussed. The report is well-structured, supported by references, and demonstrates a clear understanding of financial management principles.

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
EXERCISE 2...................................................................................................................................1
c. Discussion of advantages of scrip dividend form the point of view of companies and
shareholders.................................................................................................................................1
EXERCISE 3...................................................................................................................................2
b. Critical evaluation of benefits and limitation of all the investment appraisal techniques.......2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial management is the process of developing and managing final accounts which
are generated by an organisation to analyse actual position of business. If the accounting
professionals are not able to perform the financial analysis properly then it may result in different
challenges for business (Shapiro and Hanouna, 2019). These are lack of interest of investors,
decreased employee engagement etc. It is very important for top level executives to make sure
that they figure out causes of them and try to respond them properly. This report is based upon
analysis of different companies on the basis of their financial statements. It covers various topics
such as critical discussion of scrip dividend for an enterprise. Along with this, benefits and
limitations of different investment appraisal techniques are also covered in this project.
EXERCISE 2
c. Discussion of advantages of scrip dividend form the point of view of companies and
shareholders
All the companies offer an option to their stakeholders to take dividend or additional
shares on the capital which is invested by them within the organisation. It is considered as one of
the best suitable way for an entity to save monetary resources by ignoring cash dividend. It will
be beneficial for shareholders as well as the entity. If Lexbel will allow it to the security holders
then the company will save cash for future operations (Scrip dividend, 2020). On the other hand,
by adopting the option of scrip dividend shareholders can enhance their share within the
organisation which will help to enhance their power of decision making of the entity. There are
various advantages of it to Lexbel and its shareholders all of them are as follows:
Advantages of shareholders:
 Scrip dividend can help the shareholders to increase their decision making power because
it will increase their total capital within the organisation (Bernhart and Mai, 2016).
 With the help of scrip dividend shareholders will be able to get tax rebate as they wont
receive cash therefore no tax will be paid on the same.
Advantages of organisation (Lexbel):
 Scrip dividend will beneficial for the organisation because by offering it to the
shareholders the enterprise will be able to increase the retained earnings which could be
used in future to carry out operations in systematic manner (Lasfer, 2015). On the other
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hand another benefit of it to the company is increase equity capital which is one of the
main strength of a company.
 Most of the companies offer scrip dividend to the shareholders to retain ownership and by
using it or providing them choice between cash and scrip dividend an organisation can
maintain their interest in business. With the help of it, cash position of the business could
be enhanced along with actual gearing of business. Along with this, market position of
the organisation can also be enhanced if large number of shareholders are selecting scrip
dividend's option (Mitiku, 2015).
EXERCISE 3
b. Critical evaluation of benefits and limitation of all the investment appraisal techniques
Investment appraisal can be defined as the collection of various types of techniques
which are used by business entities for the purpose of analysing attractiveness of all the business
projects that are focused by companies to invest monetary resources in future. There are various
types of techniques which are utilised by the top level executives of Lovewell Limited for the
purpose of making decisions regarding buy a new machine or equipment (Manope, Kindangen
and Tawas, 2014). All of them are described below along with all their benefits and limitations:
The pay back period method: This technique is mainly used in capital budgeting by the
managers in order to analyse that the time period which will be taken by proposed options of
investment to repay the actual cost. It is very beneficial for all the organisations because it guides
top level executives to select best suitable project for development of business. In order to
determine that the new machine which will be purchased by Lovewell Limited in future will be
able to meet the proposed objectives such as higher cash inflow. All the benefits and limitations
of it are described below:
 Benefits: The method which is used for the calculation of pay back period is very simple
which helps the management to analyse the time easily which will be taken by a project
to repay actual cost of investment. With the help of it possibility of losses could be
reduced as it guide management of the organisation to select best option to invest their
money.
 Limitations: While using this method for the calculation of pay back period time value
of money is ignored which may affect the accuracy of its results. It is based upon
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unrealistic expectations which can misguide the management of the company to select the
right alternative to invest monetary resources.
The accounting rate of return: It is considered as one of the best investment appraisal
techniques because with the help of it managers of an organisation can determine the average
rate of return which could be acquired by them by investing in a project (Accounting rate of
return, 2020). Main purpose of using it is to determine the net income which could be generated
from a proposed investment which will be made in future. It can be used by managers of
Lovewell Limited to analyse that investing money in a new machinery will be beneficial for the
company or not. Some of its benefits and limitations are as follows:
 Benefits: The information which is required to calculate it is easily accessible which
helps the managers to calculate the accurate rate. The results of it are based upon actual
performance of the alternatives which could be selected by a company to invest monetary
resources (Mohan and Narwal, 2017).
 Limitations: Net income is taken in to consideration in the calculation of ARR rather
than cash inflows which may leave adverse impact upon accuracy of results. There is
high possibility of forecasting errors in this method as it is based upon assumptions.
The net present value: It is a method used to determine the difference between the
current cash inflow and current cash outflow over a period of time. It is a series of cash flow
occurring at different times. It is the positive or negative cash flow generated by a project
through initial capital investments. Short duration investment are mainly selected for the greatest
profit. It varies depending on the consistency of future cash flow. It is determined by calculating
the cost and benefit cash flow for each period of an investment. A positive NPV results in profit,
while a negative NPV result in loss. It is a central tool in Discounted Cash Flow (DCF) analysis
and standard method for time value of money to improve long- term projects.
The NPV analysis is a form of intrinsic valuation across finance and accounting for
determining value of business, investment security, capital budgeting and cost reduction program
etc. It's financial modelling method to identify and evaluate the profitability of proposed
investments and projects.
 Benefits:- The NPV uses all cash flow of the project including initial investment and
salvage value. One way of determining the value of different projects, divisions, and
other entities within the firm.
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 Limitations:- It is based on future cash flow and discounted rate, as both are hard to be
estimated with total accuracy. It does not provide the actual profit and loss. The project
size is not measured and can create more forecasting errors.
Internal Rate of Return (IRR):- It is a concept used in capital budgeting to estimate
profitability of investments. It is a discount rate that converts the Net Present Value (NPV) of all
cash flow of project equivalent to zero. The Internal Rate of Return (IRR) is a measure for risk-
free- rate of return, inflation, cost of capital, various financial risks, etc.
It is the “annualized effective compounded return rate” that sets all the cash flow
(both positive and negative) of Net Present Value to Zero. The IRR is designed to account for
the time preference of money and investments. It is one of the most popular capital budgeting
technique. Companies invest in different projects to generate value and maximise their
shareholders wealth with high return.
 Benefits:- It is referred as “economic rate of return (ERR)”. This method shows the
return of original money invested on a particular project. It does require the calculation of
cost of capital. It calculates an alternative cost of capital including an appropriate risk
premium.
 Limitation:- The main problem that occurs with IRR are multiple solutions can be found
from the same project. The drawback is the assumption that positive cash flow are re-
invested at the IRR gives an over-optimistic picture (Rigopoulos, 2014)
CONCLUSION
From the above project report it has been concluded that financial management is the
process of managing all the final accounts. In order to enhance market share companies can offer
scrip dividend to the shareholders as it is beneficial for both of them. There are various types of
investment appraisal techniques which could be used by companies for the purpose of
determining suitability of the project in which investment will be made. All of them are pay back
period, accounting rate of return, net present value, internal rate of return etc. With the help of all
of them a company can select an investment option which will be beneficial to reach long term
business goals.
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REFERENCES
Books and Journals:
Bernhart, G. and Mai, J. F., 2016. On the impact of a scrip dividend on an equity forward.
International Journal of Financial Engineering. 3(04). p.1650024.
Lasfer, M., 2015. Scrip Dividend. Wiley Encyclopedia of Management. pp.1-2.
Manope, B. F., Kindangen, P. and Tawas, H., 2014. Analisa kelayakan usaha komoditas biji dan
fuli pala melalui penilaian aspek finansial pada pedagang pengumpul “Kios Chandra” di
Pulau Siau. Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi.
2(4).
Mitiku, E., 2015. Determinants of Dividend Payout in Ethiopian Private Banks (Doctoral
dissertation, Addis Ababa University).
Mohan, V. and Narwal, K. P., 2017. Capital budgeting practices: State of the art. Asian Journal
of Research in Banking and Finance. 7(4). pp.57-74.
Rigopoulos, G., 2014. Real options adoption in capital budgeting: a highlight of recent literature.
Journal of economics and business research. 20(2). pp.41-51.
Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. Wiley.
Online
Scrip dividend. 2020. [Online]. Available through:
<https://money.stackexchange.com/questions/22808/why-would-a-company-issue-a-
scrip-dividend-and-how-will-this-issue-affect-me>
Accounting rate of return. 2020. [Online]. Available through:
<https://xplaind.com/393885/arr>
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