Financial Management Report: Dividend Policies and Appraisal

This report delves into the core concepts of financial management, specifically focusing on dividend policies and investment appraisal strategies. It examines the factors influencing dividend decisions, including the size of the annual dividend and practical considerations for listed companies. The report further analyzes Squeezeco's dividend options, including cash dividends, scrip dividends, and share repurchases, evaluating their implications. Furthermore, the report explores investment appraisal techniques such as payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR), providing calculations and interpretations. The analysis covers how companies make decisions that affect investment opportunities, offering a comprehensive overview of financial management principles and their application in real-world scenarios.

Financial Management

INTRODUCTION
Financial management relies on the study of the ratios, equity capital. This is useful for asset
administration, earnings distribution, investment funding, seeking to protect and track the
fluctuations of foreign exchange and product cycles (Anthony, 2019). A business has to manage
the finances wisely to maximise their earnings and it is important that the finances it obtains are
invested in such a manner that the investment profits are higher than the financing costs. The
study is focused on two separate topics related to dividend policies and investment appraisal
strategies that executives use to determine best-favourable investment initiative. Such concepts
assist in making strategic investment decisions, and also what activities they must take to
maximize their share of the market.
MAIN BODY
Question 1
1. Size of the annual dividend which return to its shareholders
Dividend is really just the proportion of the company's earnings 'income under the board
members' decision and selection; it is announced and charged as a percentage of par shares or per
security (Khan, 2020). Furthermore, dividend is a proportion of the surplus that occurs after
sufficient allocation has been made for different types of services and taxation etc. after all
spending has been subtracted in total revenue. Representative have such a duty to make this
profit, however though they can not commit to its immediate selling. When the business requires
profits then the company can retain the entire share of the income even without dividend being
paid. Dividend is therefore not reported in the event that the total income is required to be in the
form of specific funds or surplus. When deciding on dividends paid, proprietors will take into
consideration the usual two things listed below:
Fair consideration:
Managers must have a fair assessment of the level with which owners expects to receive
money benefit and take risks in return. When it is not completed, it can be difficult to keep the
creditors absolutely happy and that will also have a negative effect on the market results of
goodwill shares of the group.
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Company’s requirement:
Managing the ultimate financial position is executives' main responsibility, particularly
when leaders are being forced into making other concessions to do so. It is therefore incredibly
critical for the lender to be able to assess exactly how much additional capital the business
requires to prosper and develop.
Factors determined at the time making dividend decisions:
At the time of making decision in respect of dividend which going to distribute to the
shareholders; managers consider some factors which are as follow:
Nature of business: It would be only Squeezeco Company who periodically distributes
profits, and who provides dividend on monthly basis. Firms in this category have companies
producing products for everyday use (Greve and Man Zhang, 2017). Only companies that
participate in the public service shall regularly pay shareholder dividends. Industries dealing with
producing costly goods could not manage to pay dividend on a regular basis.
Life of firm: Emerging companies are therefore reluctant to pay decent dividends within
a few times to shareholders. In their early years they would require sufficient capital for growth
that they are never in a position to obtain easily through the marketplace. And they'd come back
with their very own inner financial capital. In contrast, older companies may require relatively
less capital but they collect it from the economy even though they do. Under such a case a
Medium Dividend Plan should be enforced.
Financial position: However, if the Squeezeco receives enough money to pay dividends
owing to its profit status, those who have not been able to pay cash dividends. Despite the
revenue and excess a corporation's liquid placement can worsen. For this situation, the
corporation needs to pay dividends in the form of shareholdings.
Financial requirement: The dividend payout plan also affects financial goals of the
Squeezeco. When a specific development program happens before the company, instead such a
organization would need to follow a strict dividend policy so that new money can be efficiently
handled by limited access. In this circumstances, greater emphasis should be given to the re-
appropriation of income.
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2. Practical issues that need to consider at the time of deciding size of dividend payment
When determining the volume of the dividend to also be charged by providing ranking to
its owners, the board members must provide it. They face multiple challenges that are addressed
below:
Investor selection: The biggest thing is the choice of shareholders, as they have different
tastes and feelings. Creditors also don't care about profits; they just need to retain the
organization where they earned compensation in order to develop new operations or expand
existing business. Since this innovation reduces the expense of the offer even though it rises the
market price of the bid’s supply that would benefit the customers at the stage of selling.
Various alternative solutions: There have been two schemes that the members of
businesses must pursue to produce gains like cash revenue and benefit divide. The main
challenge for the company is choosing that choice to satisfy investors by meeting their profit and
capital gain preferences
Investor's desire: It is difficult for a business to assess customer preferences for profit
esteem. If the firm does not focus on growth, consumers may plan to pay more than anticipated,
and expect the offer to decrease later.
Guidelines Act: The legal regime has decided to a set of corporate guidelines wherein the
organization would have to invest what it could spend. It enables the managers to maintain a
certain amount of profits for income, for example. If the business produced a 15 per cent profit, it
will in any case retain 7.5 per cent of the profits.
3. Calculate the three options
Cash dividend:
It indicates that dividend which would be paid in cash or in bank account to the investors.
If a business will have no funds to pay dividends even though they pays dividends in terms of
bonds or they could say the proprietor to given additional stock of the business (Hashim and
Piatti-Fünfkirchen, 2018). The term is called a dividend on property.
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Interpretation: Abovementioned table shows that a minimum of 1250 shares
outstanding are required to support revenue; the reward money is the option made to generate
profits. This is why the full capital gain is £ 187.5 per client, at 15 pesa.
5% Script dividend:
The corporate entity is actually selling shares of the predetermined company to existing
shareholders rather than charging cash dividends for shareholders. This allows investors to
access the system and purchase extra shares without the normally paid purchasing costs when
those financial instruments were acquired on the market. Cash funds are the primary justification
for scrip dividends being paid by the firm, as it is a beneficial tactic for a firm. Equation of the
minimum dividend referred to in table below:
Interpretation: It is calculated according to the above estimate that current outstanding
shares are 1250 while 5 % is taken from all pending transactions as are mostly remaining profits,
which would be 62.5. The cost per share is calculated at £ 270 so the company holder's full
benefit from getting new deals is £ 270.
Repurchase of 15% shares at current market price:
When the price of repurchase rises by 10%, the shareholders would have to consider a
special package (Mitchell and Calabrese, 2019). Another condition of consent for businesses to
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purchase back securities would be that the sum of the total debt, both secured and unregulated,
must not be upwards of double the sum of paid-up capital and unused assets for the organization
after the stock redemption. This can only be achieved if a greater average debt-equity ratio is set
out in the corporate law.
Interpretation: There are 1250 remaining shares where even the present market valuation
needs to be paid back at a cost of 15 %, which are 187.5. The corporation's contract expense is
50p as well as the company's actual expense is 432p. Therefore the two actually difference will
be 382p and is attractive to creditors. Squizeco repurchases the offer and confirms it was created
as sales, a share decision taken by the management.
It is advised that, by comparing one of its three strategies, these were found that the highest
trust in benefit that generates the customer's benefits is the last alternative that is repurchased
(Siminica, Motoi and Dumitru, 2017). Business repurchases the regular deals in the main option
of which the organisation's cash earnings have value.
4. Critically evaluate how companies make their decisions which affects the investment
opportunities
The greatest impact mostly on decision might be to vote for raising investment funds valued
at £ 70 million. There are total three options available which are collective bargaining agreement
lending, expanding assets through the use of shops and waste by selling interest shares. These
three situations have their major disservice and worry points. It may forecast the use of a mixture
of each of these techniques. For example; the firm could also split the shop's requirement in to
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other three amounts, e.g. 30 % by duty, 60 % by interest issue and 10 % by store holding. When
a sales problem can arise, the organization has 3 options such as:
 Right issuing of financial instruments to current shareholders.
 Grant preferred stock with fixed interest rate of dividend payout.
 Trading common shares at a lower price.
Question 3
1. Calculate the following investment appraisal techniques
Payback period: This is among the most accessible source of capital budgeting that lets
companies determine their investment turnaround time (Setiawan And et.al., 2016). Business
benefits from short payback time that required original investments to be recovered as well as
their returns to improve. Executives of the company's financial plan must agree on future
acquisitions together. It is really important to quantify the overall project risk of the businesses as
managers prefer the project which carries less danger than other programs. Moreover, because
executives have several choices, lower recovery time is appropriate or higher one is denied, and
they can make investments appropriately.
Payback period = Initial Investment / Cash Inflow
= £ 275,000 / £ 85,000
= 3.79 years
ARR: ARR also estimated the expected return probability for the acquisition or the
selling of the company in actual numbers. That's one of the easiest or fastest forms of investment
evaluation commonly used in planning process. The incremental profits are derived from original
investment. ARR is the method of capital budgeting and does not take into account all the cash
flows. The higher the yield on customer earnings is advantageous, the lesser the ARR on the
other side is no more competitive. Constantly strengthened results on various projects and
making proper management decisions. Supervisors at the corporation assess their decisions and
determine whether it should select this proposal for additional expenditure. The projection is
estimated below for 6 year and its calculation along with formula mentioned below:
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Accounting Rate of Return = £ 33,541.67 / £ 275,000 * 100
= 12.19 %
Working Notes:
NPV: That is the difference between actual value of cash inflows over a time period and
original investment's present value (Valencia-Cárdenas and Restrepo-Morales, 2016). The NPV
is being used to calculate the viability of capital budgeting and budget preparation of a proposed
enterprise or scheme. A higher present Value means that the estimated earnings produced by a
project or investment are greater than the planned costs. Spending with a positive Net present
values is deemed favourable, and a negative NPV proposal would result in a net loss. This
definition is formulated on the basis of the NPV Rule which implies that perhaps the positive
NPV of any plan is desirable for the company to approve and also that the unfavourable one is
refused. Calculation of NPV or its formula mentioned below:
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IRR: This is among the important methods of capital budgeting which most companies will
consider before deciding whether or not to select the project or it going to be successful or not.
IRR focused on a compact time period that determines the present valuation and defines cash
flow for the project at hand (Waxman, 2017). It is important to consider the company's priorities
and assess their responsibilities using the capital budgeting approach while making final
decisions on possible spending, and to take relevant or reasonable steps. Managers evaluate the
IRR in trying to make capital investment decisions, and improve sales rates of return that
generate growth and efficiency for the environment.
The Lovewell Limited will calculate the risk while using the IRR equation, as higher
earnings imply greater risk. Bad returns, from the other hand, offer a low risk to encourage the
firm to take steps and establish new strategies. Formula and calculation of IRRs are just as
follows:
PV @ 12 %
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Present value @ 20%
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Recoimmendation: From the overall evaluation, it has been observed that Lovewell
copmpany should adopt this project because it is quite beneficial for organbization to invest in it.
Net present value of this project is 43700 which is positive as well as profitable to invest, on the
other side, recovery period is also low that is around 4 years. IRR of this project is 6.56 % and
ARR is 12.19 % which are also in favoure in the organization. Managers should invest in this
project because it is priofitable as well as beneficial which helps in maximisng company’s retun
and overall earnings.
2. Critically evaluate the benefits and limitations of each investment appraisal techniques
Payback period:
 Benefits: Payback period is great benefit to a company's owner and does not need to
make more complicated calculations trying to take account of such considerations like
product costs and advertisement impacts. The decision about whether or not to pick a
proposal is one of the most important decisions that can be done entirely by
implementing this technique of capital budgeting. With the help of this method, managers
can pick the right portfolio distribution. This would encourage accelerated reaction, as it
would make the business to regain the original price in a minimum of time.
 Limitations: Among the most important drawbacks of the payback period approach is
that it wasn't measured by time value. During the project initiation years, the cash flow is
given greater value than in later life. The very same payback period extends to two
businesses (Moortgat, Annaert and Deloof, 2017). Nevertheless, one spends more money
during the first three years to generate more cash flow. The second investment offers
additional cash returns in later years. This example does not specify which organization
they choose to repay for. Managers can stop uncomfortable NPVs, as often make big
choices that do no harm. The strategy does not recognize money investments and will
depend on an average duration, as each spending would have had the same cash flow as
some other choices.
Accounting rate of return (ARR):
 Benefits: ARR offers businesses the chance to make high investments. Powerful
revenues are safe and productive for the firm. The management reviews the plan for an
ARR by choosing the correct one before taking final decisions. This approach recognizes
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the importance of monitoring that managers frequently overlook during the
implementation stage.
 Limitations: It does not take into consideration the time value of the properties. There is
also an unscientific approach to calculating capital spending. Typical requirements for
dividends do not take into account the net balance of funds, which depends on both
income transparency and real benefits. This would also impact the different operations
which have to be taken out. Under this research approach the impact as well as the
project's end result or feasibility are overlooked.
Net present value (NPV):
 Benefits: The lot of businesses just use NPV to measure the investment and to decide
whether the organization is investing on this initiative. The favorable project is
accepted and unfavourable NPV would be ignored because this action will not help the
customer. This aspect of financial analysis takes into account the time worth of assets and
offers businesses better opportunities. Managers will make choices and depend on the
NPV’s valuation.
 Limitations: Limitations: These approaches can be used by administrators to determine
the viability of their proposals or to compare them with several other proposals, but it is
not because all financing activities in a project are equivalent. They have to check or
prove if the initial spending is low, because there are no valid findings. If the net present
value is adjusted, and is calculated by the decreased cost, additional factors such as
inflation are excluded.
Internal rate of return (IRR):
 Benefits: IRR was mainly often used characterize the return company earned directly
after the investment, and to allow more logical decisions (Shakeel and Datta, 2020).
Managerial choices that decide greater returns in whose project allows businesses to
maximize their profits support the company's preference of the most successful team
leaders.
 Limitations: IRR does not really consider economies of scale which have an effect on
performance. It is calculated by means of an impact & control mechanism that does not
yield any exact results. This also impacts autonomous decision taking systems.
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Additionally, loans or borrowings have no such distinction. That business has different
returns, due to the reduced prices, and spending choices on the managers are challenging.
CONCLUSION
From the overall discussion it has been concluded that financial management used for
allocating financial resources and distribute the dividend as per the company’s policies. On the
other side, by using appropriate investment appraisal techniques managers able to find the most
profitable project which maximise the overall earnings. It is one of crucial method to evaluate
investment or identify that, in future it will be beneficial or not in term of money.
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REFERENCES
Books & Journals
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