Financial Management: Analysis of Mergers, Takeovers, and Investments

This report provides a comprehensive analysis of financial management, focusing on mergers, takeovers, and investment appraisal techniques. It begins with an introduction to financial management, emphasizing the planning, direction, and management of financial functions within an enterprise. The report then delves into the valuation of companies in mergers and takeovers, exploring techniques like price-earnings ratio, dividend valuation method, and discounted cash flow method. It critically discusses the benefits and limitations of each valuation technique, offering recommendations for their application. Furthermore, the report examines investment appraisal techniques, including payback period and accounting rate of return, assessing their usefulness in evaluating investment opportunities. The study includes calculations and critical analyses of these techniques, providing a well-rounded understanding of financial management principles and practices. The report is structured to provide a clear understanding of different financial management strategies. The report concludes with a summary of key findings and references.

FINANCIAL
MANAGEMENT

Contents
INTRODUCTION.......................................................................................................................................3
QUESTION 2..............................................................................................................................................3
Mergers and takeovers.............................................................................................................................3
QUESTION 3..............................................................................................................................................7
Investment appraisal techniques..............................................................................................................7
Critically analysis of investment appraisal techniques with their benefits and limitations.....................13
CONCLUSION.........................................................................................................................................15
REFERENCES..........................................................................................................................................16

INTRODUCTION
Financial management implies to orderly and efficient process pertains to plan
management, direction, regulate and manage financial functions like set, production and
utilization of various sources capital within enterprise (Argerich, Hormiga and Valls-Pasola,
2013). Essentially that really is organized use of principles and policies summoned by handling
officials to manage organization’s savings. This study-report is targeted on distinct faculties and
elements of fiscal regulation that empower to find-out most efficacious right-issue for equity and
organization option. Additionally, it discusses about the different techniques like price earning,
dividend yield to analysis the position of business. Along with, analysis different investment
appraisal techniques to calculate the different results. Additionally critically analysis of these
different techniques of investment with their benefits and limitations.
QUESTION 2
Mergers and takeovers
Merger & takeovers is a common strategy used to define the sale of businesses or
properties by different forms of money transactions, like mergers, takeovers, restructurings, and
tendering deals, mergers of properties and investments of administration. The term M&A also
relates to the departments which deal with this operation at investment banks. There is defined
different strategy for the valuation of other company such as:
Price earnings ratio: It provides a notion of the sector is eager to cover business
earnings. Additionally, it indicates the way a stock is appreciated on the marketplace. Businesses
using high price-earnings ratio in many cases are regarded as growth stocks. This usually means
that investors have high expectations for future earnings growth and would be happy to pay out
more to these since it signals that a confident future operation. Businesses having a low price-
earnings ratio in many cases are regarded to own stocks that were undervalued. This usually
means that the purchase price of the inventory is relatively tiny. An organization with a non P/E
ratio is normally a sign of a feeble current in addition to prospective operation.
Aztec P/E ratio 3.89 / 0.21 18.52

Trojan Plc 40.4 / 147 27.48
Share price of Trojan Plc 18.52 * 27.48 5.08
Total market value 147 * 5.08 746.76
Assumption is made here that the market expects Aztec to accomplish a return on Trojan’s assets
comparable to that on its own assets.
Dividend valuation method: It is equal of the total of the cash flow n particular year of
activity that helps to divide by one rate to the ability in certain period of time. This method
additionally referred to as DDM, where inventory price is figured dependent on the probable
gains which may be paid plus they'll soon be ignored at the expected annual speed. That is to say,
it's a manner of valuing a business in line with the notion that the stock would be well worth the
discounted amount of most its prospective dividend obligations. To put it differently, it's used to
rate stocks primarily based on the net present worth of future volatility (Entwistle, 2015).
To calculate of dividend require the dividend model values for both g and r such as:
G = (13 / 10) = 1.14%
Alternatively g = 4 √ (13 / 10) = 1.14%
The cost of equity using CAPM
Ke = 5 + (1.10 * (11 – 5)) = 11.60%
Po = 0.116 – 0.114 = 0.002
Total market value = 147 * 0.002 = 294m
Discounted cash flow method: The discounted cash flow (DCF) formula is equal to the
sum of their cash flow in every period divided by one and the discount rate (WACC) raised to
the energy of this time number. Present value advice is of use to get investors, under the concept
which the value of an advantage right now may be worth more than the value of that same
advantage that is only available at a later date. An investor will utilize the discounted cash flow
method to derive the present value of several competing investments, and also usually chooses

the one that has the highest present value. The buyer might not decide on an investment with the
highest present value in case it is also deemed a riskier opportunity compared to the other
prospective investments.
There is using discount cash flow’s using WACC of Aztec
Present value of earnings = 40.4 * 1.02 / (0.09 – 0.02) = 588.68
Present value of assets sale = 21m / 1.09 = 19.27
Present value of synergy = 5 / 0.09 = 55.56
Total present value of Trojan Plc = 588.68 + 19.27 + 55.56 = 663.51
Critically discuss the problems associated with using the above valuation techniques and based
on this which of the above you would recommend the board of Aztec to use
Price earnings ratio
Benefits
1. Widespread use: The P / E ratio is commonly seen in the equity market and also in technology
stocks such as banking and protection.
2. Simple to measure: The estimation of the cost-earnings ratio is quite straightforward. The
share price and the EPS (earning per share) are just required.
3. Share price: Allow shareholders to recognize what they will be going to pay for each
dollar in exchange for the stock. They can count on this knowledge to recognize underrated
shares (Finke, 2013).
Limitation
1. Accounting practices: Common accounting practices hinder PE relations between businesses
and various countries. Such measures provide the approaches used for impairment, depreciation,
and taxation.

2. Subjective in nature: The competitive aspect of securities makes it impossible to figure out
what price dividends we will sell in order to make P / E subjective.
3. Additional cost risk: Getting up or share afford-backs will boost the company's profits but this
will lead to higher threat expense for doing it.
4. Inaccurate details: P / E can mislead leverage-operating companies. The periodic elevated
profits will lead to unusual results via the selling of business assets.
Dividend valuation method
Benefits
No dependence on Control: Dividends would be the sole step of evaluation readily
available to the minority person. While institutional investors may acquire huge stakes and
actually help determine the dividend stocks, minority investors don't have any control within the
business. Ergo, the thing they may make sure about is the truth which they'll get dividend year
annually only because they've now been receiving it in the past. Thus, so far as minority
investors are worried, volatility is the only metric they are able to utilize to appreciate a business
(Guastello, 2014).
.
Mature Firms: The normal payment of gains is your indication that an organization has
developed in its small business. Its own company is stable and there isn't much anticipation of
turbulence from the long run unless something radical happens. This advice is invaluable to a lot
of investors that prefer stability over potential of fast advantages. Ergo, in the valuation
perspective, it's much simpler to reach at a reduction rate. Since consistency eliminates danger,
volatility is usually ignored in a lower speed compared to additional metrics which may be
utilized in evaluation.
Limitations
1. The foremost is it can't be utilized to appraise stocks which do not pay dividends, but no
matter capital profits that can possibly be accomplished in purchasing the stock
exchange. The DDM is developed on the faulty assumption that the only real value of an

inventory could be that the yield on investment it provides throughout dividends. The
other short coming of this DDM could be the simple fact the worthiness it uses takes
quite a few assumptions seeing matters like growth speed and necessary rate of yield.
2. It may be that dividend yields change appreciably with time. If any one of the exemptions
or assumptions made in the calculation are slightly in mistake, this may lead to a analyst
discovering a value for a stock that's considerably off when it comes to be over-valued or
undervalued. There really are a range of variations of this DDM that make an effort to
overcome this issue. But the majority of these involve making additional predictions and
projections which will also be at the mercy of errors which can be magnified overtime
(Halstead, Jones, Lesseig and Smythe, 2016).
Discounted cash flow method
Benefits
One Price: A significant benefit of this discounted cash flow model is that it reduces
investment to one figure. This permits for up-or-down conclusions on human investments.
What's more, the procedure lets you make decisions among substantially distinct investments.
Job each investment cash flows, dismiss them presenting price, put up them, and compare them.
Usually the person with all the greatest net present value has become easily the most lucrative
choice.
Truth and Dependability: Business fund proposal writers Jonathan Berk and Peter
DeMarzo say that having discounted income to reduce commissions into net present value is
“probably the most trustworthy and accurate" way that there was in making investment
decisions. Given the quotes that move in to the calculations tend to be less or more correct, no
additional procedure will not nearly as good a job in pinpointing that investments deliver
maximum price.
Limitations
DCF Valuation is excessively painful and sensitive to assumptions associated with endless
growth rate and reduction. Any slight tweaking in some places, and also the DCF Valuation will
fluctuate tremendously and the acceptable value therefore generated won’t be true. It works most

useful just once there's a high amount of confidence in future income flows. However, in the
event the provider's operations lack visibility, then it will become tough to predict earnings,
operating expenses and capital investment together with certainty. While calling cash flows to
the upcoming few years is difficult, pushing out them becomes virtually hopeless. Therefore,
DCF process is vulnerable to malfunction when not properly accounted for all these input
signals.
Recommendations
As per the above techniques it is analyzed that all the techniques are useful for the merger
and takeovers so for the different things apply three techniques in business.
QUESTION 3
Investment appraisal techniques
Investment evaluation methods comprise various techniques that are utilized by the
associations to appraise beauty of almost any investment. The majority of the organizations
adopt these methods and quantify how beneficial in addition to profitable it's. These procedures
aids in assessing single job and from then on managers will pick the most suitable. Intent behind
this system is to determine feasibility and high quality of job and after which produce
conclusions regarding additional investment (Kumari, 2015). Managers of Love-well limited
follow with this particular technique to spot that investment is rewarding or beneficial for not.
Additionally Suggest that Business ought to in this not its additional calculation cited below:
Payback period: This can be described as a form of methodology that has been
connected to the approximate time span estimation phase which may happen in the process of
separating capital costs. It's a very valuable tool to measure project performance in an accurate
way as it helps businesses to quantify time periods. Like in the Love-well private company
dimension earlier, their plan within this strategy was measured.
Particulars Amount
Initial investment 275000
Cash inflow (A) 85000

Cash outflow (B) 12500
Cash flow (A-B) 72500
Payback period 3.79 years
Accounting rate of return: This strategy is recognized as average rate of return.
Underneath it, the average rate of return about which gain can be created on specific projects is
determined. Just as in the project of the above-mentioned business this methodology was
implemented to determine work performance.
Accounting rate of return- Cash flow after depreciation / Initial investment x 100
Initial investment = 275000 pounds
Particular Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Cash In-flow 85000 85000 85000 85000 85000 85000
(-) Cash out-flow 12500 12500 12500 12500 12500 12500
Net Cash flow 72500 72500 72500 72500 72500 72500
(-) Depreciation (on the basis of
straight line method @ 15%) 38958.33
38958.3
3 38958.33
38958.3
3
38958.3
3
38958.
33
Net Cash flows after depreciation 33541.67
33541.6
7 33541.67
33541.6
7
33541.6
7
33541.
67
Average investment 275000
Accounting rate of return 45.85%

Net present value: This is similar to the approach that actually supports the calculation
of the real value of net inflows that must be better than the sum of the transaction. NPV can be
used to determine whether to pick the financial plan or, in situation of unfavorable cash inflows,
it is used to look for additional project that can offer better good outcomes. NPV supports with
either the deflation age in determining the projected cash-flow every year (Lopes and Ferraz,
2016). The outcome will be either correct or incorrect too. The approach often includes a
reduced component that, at the moment of determining the actual value of capital, is considered
to become a critical aspect.

Net Present value (NPV) = 318700 - 275000
= 43700 Pounds
Internal rate of return: It is one of those fundamental procedures of investment
direction that is properly used one of many organizations to find out proposal is powerful or
perhaps not therefore productive. Internal rate of interest on the grounds of this low cost period
assessing the present price and farther pinpointing the lien to get the specific job. Until
attempting to earn any investment judgments, corporations need to reevaluate their investment
employing the funding financial preparation procedure and choose extra plan so. While
determining upon potential financial commitment, executives rate the IRR and the advantage is
helpful to the provider that offers both future and productivity improvement. Applying IRR is