Financial Management: Investment Appraisal Techniques

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FINANCIAL MANAGEMENT
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Table of Contents
Q: 2..................................................................................................................................................3
Q: 3..................................................................................................................................................7
References......................................................................................................................................14
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Q: 2
(a)
The below is associated with the issuing of right shares at £ 1.8 per share price.
Particulars Number of shares Amount (£)
Rights issue @ 1.80 100,000 180,000
Shares of .50 each 600,000 300,000
Total shares 600,000
300,00
0
value per share 0.5
The below is associated with the issuing of right shares at £ 1.6 per share price (Müsgens, 2018).
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Particulars Number of shares Amount (£)
rights issue at £1.60 112500 180,000
shares of .50 each 600,000 300,000
total shares 600000 300000
value per share 0.5
The below is associated with the issuing of right shares at £ 1.4 per share price
Particulars Number of shares Amount (£)
rights issue at £ 1.40 128571.4286 180,000
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shares of .50 each 600,000 300,000
total shares 128571.4286 180000
value per share 1.4
Profit after tax is being calculated in the below table and corporate tax is applicable 20
percent.
Particulars Amount (£)
Reserves 400,000
Equity shareholders funds 480000
Total 480,000
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Tax @ 20% 96000
Profit after tax 384,000
Earnings per share = Net income/no. 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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Value of shares is issued at different prices
Theoretical ex-price 1.8 (£) 1.6 (£) 1.4 (£)
Market value before rights
issue
880,00
0
880,00
0
880,00
0
cash proceeds from rights
issue
180,00
0
180,00
0
180,00
0
total
1,060,00
0
1,060,00
0
1,060,00
0
number of shares
700,00
0
712,50
0
728,57
1
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ex- price per share 1.514285714
1.48771929
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1.45490281
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(b)
The question of dividend is arising by the company’s shareholders only in case when company
making profit and also in case when making no profit but want to pay dividend due to the reason
being company want to maintain their confidence over the company and satisfy their need of
money by the paying of dividend (Berger, et. al., 2018).
Generally, the dividend is paid by the organization when it makes profits or having higher
earnings. The company paid a dividend from the profits earned throughout the period of
accounting. It may also access the right to pay a dividend from out of its retained earnings and
reserves but there is a condition on paying from company reserves surplus (Sastry, and
Balakrishnan, 2018). To pay from these two sources it needs to take approval from the
shareholders by conducting a meeting on the agenda of dividend and clear the reason of being
why the company not provide dividend and also present organization performance reports which
are company financial documents such are balance sheet and revenue or income statement.
The dividend is the right of shareholders in order to take the return on the amount invested in the
business.
There are two reasons between the dividend is not paid by the organization. First, is the company
wanted to expand its business and thus it required capital so in order to spread their business to
want to make reserves in the company accounts? And the other reason is that a company having
no profits in the current year so it is unable to pay a dividend on time (Ismail, et. al., 2018).
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A scrip dividend is an opportunity or advantages to the company to provide dividend in cash or
in issuing additional right shares. Company such issuing right shares in the case when a firm has
not so much enough amounts in order to pay a dividend in cash.
The scrip dividend provides benefit not only company but it is also benefitted to the
shareholders. To know how it is a benefit to both companies as well as shareholders following
points clear that difference between advantages between them.
Benefits for shareholders:
 It helps in satisfying the needs of each individual shareholder as it provides offer either take the
dividend in cash form or take new right shares instead of taking cash dividend. The cash
dividend takes only by those shareholders who are true of cash otherwise the shareholders take
right of taking right shares instead of because these are the shareholders who want to
appreciation in the price of shares (Zelalem, 2018).
 It helps to shareholders to save tax amount because as the shareholders go to choose dividend in
the form of additional shares it eliminates tax liability to pay. As the income does not earn so the
liability of tax not created. Hence it provides tax exemption facility.
 It also provides to save transaction cost on shares when the shares value decline.
Benefits to the organization/company:
 The scrip dividend provides benefit to the firm as it helps in saves their retained earnings and any
other reserve into share capital permanently.
 The scrip dividend also helps in increasing the organization's borrowing powers. The reason for
being increase borrowing power is that it helps in increasing the price of shares or value of
shares (Feito-Ruiz, et. al., 2018).
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 Aid in saves the firm's cash because the company not issue a dividend in cash form because it is
the facility which ultimately increases company cash position and also helps in presenting
organization financial performance reports.
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Q: 3
(a)
The purpose of appraisal of investment is to evaluate the proposed investments project on the
basis of the high profitability and less time required to get back the return on the investment.
Access the viability of investment project, decisions and value generated. In simple words, it is a
bundle of tools and techniques used for the aim to identify the influencing of an investment.
Thus it is an internal or integral part of capital budgeting (DeBoeuf, et. al., 2018).
Salvage value 32000
Time (Yr) 6
Cost of Capital (COC) 12%
Annual Outflow 15500
Initial Investment 320000
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Diminishing Rate of Depreciation (WDV) 20%
Annual Inflow 105000
(i)
Payback period: It is a capital budgeting refers to the amount of period required to get back the
capital or funds invested in the projector to attain the BEP which means break-even point. In
simple words, it can be defined it help to the management to determine the length of time
required for the purpose of covering the initial investment in the project (Bader, et. al., 2018).
Particulars Amount (£)
Initial Investment 320,000
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