Financial Management Homework: Investment Appraisal Techniques

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Financial Management
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Contents
Q 2...................................................................................................................................................3
Q 3...................................................................................................................................................7
Reference.......................................................................................................................................13
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Q 2
(a)
The following table presenting the total numbers of share issued after the right shares at £ 1.8 per
share price.
Particulars Number of shares Amount (£)
Shares of .50 each 600,000 300,000
Rights issue @ 1.80 100,000 180,000
Total shares 700,000 480,000
value per share 0.685714286
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The following table presenting the total numbers of share issued after the right shares at £ 1.6 per
share price.
Particulars Number of shares Amount (£)
shares of .50 each 600,000 300,000
rights issue at £1.60 112500 180,000
total shares 712500 480000
value per share 0.673684211
The following table presenting the total numbers of share issued after the right shares at £ 1.4 per
share price.
Particulars Number of shares Amount (£)
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shares of .50 each 600,000 300,000
rights issue at £ 1.40 128571.4286 180,000
total shares 728571.4286 480000
value per share 0.658823529
Tax rate 20 percent, and showing this below profit after tax.
Particulars Amount (£)
Equity shareholders funds 480000
Reserves 400,000
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Total 880,000
Tax @ 20% 176000
Profit after tax 704,000
Following table is produce the EPS at the various price of shares such as £ 1.8, 1.6 and 1.4
EPS = Net profit/revenue/income divided by the number of shares outstanding
Particulars at 1.8 (£) at 1.6 (£) at 1.4 (£)
Profit after tax 704,000 704,000 704,000
No. of shares 700,000 712,500 728,571
earnings per share 1.005714286 0.988070175 0.966275078
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The value of shares is £ 0.98 if the right shares issuing at £ 1.6 cost of per share and £ 0.96 when
issued at £ 1.4. So it is clear from the above table that the EPS of the company is higher if the
right shares issued at £ 1.8 rather than made issued of right shares at £ 1.6 and 1.4 (Caballero, et.
al., 2017).
Theoretical ex-price 1.8 (£) 1.6 (£) 1.4 (£)
Market value before the rights
issue 880,000 880,000 880,000
cash proceeds from rights issue 180,000 180,000 180,000
total 1,060,000 1,060,000 1,060,000
number of shares 700,000 712,500 728,571
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ex- price per share 1.514285714 1.487719298 1.454902817
Theoretical ex-price of shares is higher only in case when the company goes to issue right shares
at £ 1.8. The other option is not permissible due to the value of right shares are not enough or
less than the price at £ 1.8 (Brown, et. al., 2015).
(b)
The company paid the dividend only when the company made a profit from its business
operations and sometimes the company also use the right to provide a dividend to the
shareholders out from reserves and retained earnings but such option is only taken when there is
urgency or important to disburse or distribute dividend. Generally, the dividend is part of the
income of the company (Abraham, et. al., 2015).
A scrip dividend is a plan of a company paying either share in equivalent o the amount of
dividend or paid dividend in cash form. In simple words, it means when a company provides an
offer to the shareholders either purchases new shares instead of taking dividend cash or access
right to take cash dividend (Simshauser, and Catt, 2012).
A scrip dividend provides several benefits to both shareholders and companies in the following
manner:
Merits
For shareholders:
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 By using the right of scrip dividend by the shareholders, it helps in fulfilling their needs which
ultimately work on satisfying their personal needs and requirement. The scrip dividend offers to
the shareholders of the company that either received the dividend in cash or received new
additional shares equivalent to the amount of dividend (Bradford, et. al., 2013).
For example, one person who only want money help to the received dividend in cash and other
who want to increase the price of shares go to taking the option of receiving new shares for
creating the price of shares high.
 When taking an option to go to accept new additional shares by the shareholders, it helps in
saving tax amount because purchasing of new not create any liability towards tax obligations as
in case if accept dividend in cash then only in such case tax liability create and need to pay on
time. So it is an advantage to reduce tax liability.
 In case the value of shares is going to down then scrip dividend has the advantage to accept in
order to save transaction cost.
Other advantages are:
 Help in the preservation of cash for the purpose of reinvestment.
 Not reduce the value of shares unless not significantly.
 More shares can be possessed without pay any transaction cost (Mallin, and Melis, 2012).
For Company:
 It helps in saving the company cash amount because if the dividend is paid in additional shares
then there is no need to pay a dividend in cash form.
 It also increases the company borrowing power because as the company begins to issue scrip
dividend it tends to increase or high the equity price of the organization because of this help in
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reducing the gearing ratio which directly helps the organization to easily borrow funds from
outside the business (Coetzee, and De Wet, 2014).
 It enables the company to convert to retained profits and reserve into permanent share capital.
 Aid in the adjustment of the equity of the company base into the more proper level for those
companies or organization whose business is falling down (Armitage, 2012).
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 Q 3
(a)
For the appraisal of investment proposal various appraisal technique of investment is used for the
purpose of choosing the best investment project which able to generate high earning with
requiring less amount of time in order to complete the proposed investment project (Maroyi, and
van der Poll, 2012).
Initial Investment 320000
Annual Inflow 105000
Annual Outflow 15500
Time (Yr) 6
Salvage value 32000
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Cost of Capital (COC) 12%
Diminishing Rate of Depreciation (WDV) 20%
(i)
PBP
It is a method of evaluating investment proposal. It shows how much time is necessary or
required in order to recover the initial cost of the investment proposal. The answer got from this
method is only in a number of years.
Particulars Amount
Initial Investment 320,000
Cash inflow for 5 years 232,358
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