Financial Management Report: Lexbel Plc. Rights Issue Analysis

Desklib provides solved assignments and past papers to help students understand complex financial concepts.

Financial Management
1

Contents
Question 2........................................................................................................................................3
Question 3........................................................................................................................................6
References......................................................................................................................................18
2

Question 2
a)
Following table shows the number of shares after the issuing of rights shares at (£) 1.8 per share.
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 0.68
Following table shows the number of shares after the issuing of rights shares at (£) 1.6 per share
Particulars Number of shares Amount (£)
shares of .50 each 600,000 300,000
rights issue at £1.60 112,500 180,000
total shares 712,500 480,000
value per share 0.673
3

Following table shows the number of shares after the issuing of rights shares at (£) 1.4 per share.
Particulars Number of shares Amount (£)
shares of .50 each 600,000 300,000
rights issue at £ 1.40 128571.4286 180,000
total shares 728571.4286 480,000
value per share 0.65
Following table is showing the profit of the company after tax:
Particulars Amount (£)
Equity shareholders funds 480000
Reserves 400,000
Total 880,000
Tax @ 20% 176000
4

Profit after tax (PAT) 704,000
The below table showing EPS (earning per share) at three different values:
Earnings per share = Net income/no. of shares outstanding
Particulars £ 1.8 £ 1.6 £ 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
The option of issuing right shares to the shareholders of the Lexbel Plc. Company will increase
the earning per share of the company’s share if this will be the right issue is made at £ 1.8. The
EPS is only high in case of issue right share £ 1.8 rather than other price. It can be said that the
share value of the right share is diluted. If the company go to issue right share £ 1.6 then in this
the value of share dilutes at £ 1.26 and if right share issue at the price of £1.4 then in such the
share value is at £ 0.96.
Below table is related to theoretical which shows the ex-price of the shares:
Theoretical ex-price £ 1.8 £ 1.6 £ 1.4
Market value before rights issue 880,000 880,000 880,000
cash proceeds from rights issue 180,000 180,000 180,000
5

total 1,060,000 1,060,000 1,060,000
number of shares 700,000 712,500 728,571
Ex- price per share 1.514285714 1.487719298 1.454902817
In the above different level of right issue, it can be seen that the theoretical ex-price of share is
highest at£ 1.8 than the other price of shares. Now seen this, it is analyze that the right issue of
share made at £ 1.8 because it increase the ex-theoretical price of each shares, so from this
evidence it is suggested to the Lexbel Plc. Company issue of right share at £ 1.8 instead of other
price.
b)
Dividend is only paid by the company when there is profit in the business earned during the year.
The company need to pay dividend only in case if company is profitable and this should be paid
by the company after meeting all the expense and liabilities like tax and other (Money-Zine,
2019).
A company need to pay dividend but it has two options to pay dividend to the shareholders either
pay in cash or by issuing new shares which is known as right shares.
A right shares is not any special shares, it just posses the right over the other shares that if
company want to issue right share then first it offer to the existing shareholders of the company
after then it go to the general public, if existing shareholders not subscribe (Study.com, 2019).
Following are the advantages or benefits to the shareholders and company by the use of scrip
dividend.
6

1) benefits of scrip dividend for the shareholders:
 The scrip dividend is better to the shareholders of the company because it facilitate to
choose one option out of two according to their needs and purpose. The two options are
received dividend either cash or in taking new additional or fresh shares. Thus these two
options lead to fulfil their needs as per their wants. For example, if one investor want
cash then he will choose to get dividend in cash form and one want to increase the price
of share then he will received dividend in choose new fresh shares instead of cash
dividend.
 If the shareholders not want to pay additional cost then they will go to choose the option
to received dividend in form of fresh shares, this is because the shareholders think that
the share value may be undervalued in future.
 Choosing of dividend in form of new fresh shares provide an extra benefit to the
shareholders as they need to pay tax because of the rule that there is no income no tax
rule is applicable. It means choose an option to received additional shares, exempt to pay
tax.
2) For the company:
 The dividend paid by the company will lead to save the cash, the reason is being that
dividend paid to the shareholders in form of additional shares rather than in cash which
help and assist company to use such cash in the other part of the company for the
development and growth. It also provides an additional benefit to the company that this
will not change the company cash position and not in cash flow statement.
 When the scrip dividend is less or minimum in amount then it not effect on the value of
shares and not diluted the shares which is subscribe. This is possible only in case of fewer
amounts but in case where the scrip dividend is paid in large amount then it impact on the
dilute value of share.
 This will also provide an advantage to the company to increase their borrowing strength
or make borrowing power more strong and this will also increase the value of equity.
Low gearing ratio is also been impacted in positive way and it help in raising the more
funds foam outside business.
7

Question 3
(a) Investment appraisal is a way to measure the investment by using the tools and techniques of
investment. Investment appraisal is a capital budgeting which is used by the firm for investing
for long term by analyze the investment profitability through the implications or different
methods of investment appraisal within the organization so that outcome from the investment
can be obtained in an realistic way before making investment in any project. The other purpose
of investment appraisal is to measure and check the viability of project and helps in decision
making regarding the investment in project. Such methods of investment appraisal are below
using in this scenario for choose the best investment project by the best method that will help in
generating a good return with minimum time and also aid in the expansion of business.
1. Payback period (PBP)
2. Accounting Rate of Return (ARR)
3. Net present value (NPV)
4. Internal Rate of Return (IRR)
To solve and evaluate in order to find the best method for the purpose of investment in the
project the above all four methods of investment are used in the investment. The motive of used
these four methods are to discover which method is suitable to the investment for the purposing
of generating good return from the investment with taking less time in order to cover the cost of
investment (Rossi, 2015).
Initial investment 320000
8

Cash annual Inflow 105000
Cash annual Outflow 15500
Time (in Year) 6
Salvage value 32000
Cost of Capital (COC) 12%
WDV Rate 20%
9

i. Payback Period:
Particulars £
Investment 320,000
Cash inflow for 5 years 232,358
Remaining Amount 87,642
Time required 10.46
Total Payback Period 5 years 10 months
The Payback period provide the information about the time to require in order recovering the
cost of investment. Minimum payback period is preferable for the company as it enable to
recover the cost of investment in minimum time so company cash use such capital in any other
project of the organization.
10

In this case, the payback period of the investment of £ 320,000 is to recover in 5 years and 10
months. As soon as the amount of capital is recover, firm will able to generate profit from the
investment because the extra exceed of cash from the cost is known as profit. So the profit is
generated in near future.
ii. Accounting rate of return
ARR =
Average Net profit
X 100
Average Investment
ARR =
100,528
X100
176000
ARR = 57.11 %
11

Accounting Rate of Return is a financial ratio used by the firm in capital budgeting and this is
also known as Average rate of return. This method is used to calculate the return generated from
the net profit or income of the proposed investment project.
A project from this method is only acceptable in case where the ARR is higher than the company
COC’s. As the calculation made, the result is obtained the ARR is more than the cost of capital.
Hence this project of investment is acceptable for the company due to generating good return in
future (Accounting tools, 2018).
Working note:
Average Investment =
Initial Investment + Salvage Value
2
Average Investment = 176000
12