APC308 Financial Management 2020/21Weighting – 100% of the marks for this moduleThis is an individual assignment of 3,000 words. (+ or – 10%)Students are required to submit their assignments through Turnitin on Canvas and JIRA for marking. Only assessments submitted through Canvas and JIRA will be marked.Requirements
You must answer any TWO questions. Each question that is attempted will carry a maximum mark of 50%Canvas & JIRA Deadline:
Question 1 –Long term finance: Equity finance (a) Lexbel PLCgenerates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its currentcapital structure is as follows:£Ordinary shares of 25p each300,000Reserves 400,000700,000The board of Lexbel PLCwishes to raise £180,000 from a right issue to expand existing operations. Its return on shareholders’ funds will be unchanged.
The current ex-dividend market price of Lexbel PLCis £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60,and £1.40
.(a) Determine the:i.number of shares to be issued,ii.theoretical ex-rights price,iii. expected earnings per share andiv. form of the issue for each rights issue price, andv. Present your results in a tabular form and critically evaluate the best option among the three rightissues(20 marks)
(b) It has become common for companies to offer their shareholders a choice between a cash dividendand an equivalent scrip dividend. Critically discuss the advantages of scrip dividends from the point ofview of the companyand theshareholders,ensuring the response draws upon relevant academicresearch within this highly topical area of financial management. (30 marks)
Question 2 -Investment Appraisal TechniquesHappy Meal Limited a food manufacturer is considering purchasing a new machine for £320,000. The company is expecting an annual cash inflow of £105,000 from the sale of products and an annual cash outflow of £15,500 for each of the six years of the machine’s useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using a15% reducing method. The machine is expected to last for sixyears, with a residual value estimated to be at the rate of 10% of the original cost of the machine. The cost of capital for Happy Meal Limited is 12%.You are required to:
(a) Calculate using the following investment appraisal techniques, and provide briefrecommendations as to the economic feasibility of acquiring the machine:i.The Payback Period.ii.The Accounting Rate of Return.iii.The Net Present Value.iv.The Internal Rate of Return (to two decimal places)(20 marks)
(b) Critically evaluate the benefits and limitations of each of the differing investment appraisaltechniques, ensuring the response is supported with relevant academic research. (30 marks)
Question 3 –Mergers and Takeovers The managing directors of KADLexPLC are considering what value to place on Dragon PLC, a company that they are planning to take-oversoon.KADLex’s share price is currently £3.89 and the company’s earnings per share stand at 21p. KADLex’sweighted average cost of capital is 9%.The board estimates that annual after-tax synergy benefits resulting from the takeover will be £4.35m, that Dragon’sdistributable earnings will grow at an annual rate of 2.5%.That duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing at 20%), in a year’s time. Information relating to Dragon PLC:Financial Statement of Dragon PLC£m£mNon-current assets270Current assets56Total assets326EquityOrdinary Shares (£1)147Reserves642117% bonds72Current liabilities43Total liabilities326
Statement of Profit or Loss extracts£mProfit before interest and tax64.0Interest payments6.5Profit before tax57.5Taxation17.1Distributable earnings40.4Other financial market information:Current ex-div share price£2.05Latest dividend payment13pPast four years dividends payment10p, 10.5p, 11p, 12pDragon’sequity beta1.1 %Treasury billsyield5%Return on the market11%Given the above information calculate the value of Dragon PLC using the following valuation methods:a)Price/earnings ratio(10 marks)b)Discounted cash flow method(10 marks)c)Dividend valuation method(10 marks)d)Drawing on the mergers and takeovers literature, critically discuss the problems associated withusing the above valuation techniques.Basedon your opinion,which of the above valuationtechniqueswould you recommend with economic justifications to the board of KADLexPLCtousein this acquisition.(20 marks)
Table 1 Applied Penalties for Exceeding the wordcount.Word limitPenaltyActual WordCountExceeds limit by up to10%No penalty –tolerance band (seebelow)3300Exceeds limitby10.1-20%-5%3301 –3600Exceeds limit by20.1-30%-10%3601 -3900Exceeds limit by30.1-40%-15%3901 -4200Exceeds limit by40.1-50%-20%4201 -4500Exceedslimitbymorethan50%Mark ofzero4501+
The learning outcomes forthis module assessed by this piece of workareKnowledge1.Examinedandcriticallyevaluatedthekeystrategicdecisionsthatabusinessmayhavetomakeandappreciated how accounting and finance can assist in making and evaluating thosedecisions.2.Acriticalunderstandingofspecificanalyticalskillsinkeydecisionareaswithinstrategyandfinanceat local and internationallevel3.AcriticalunderstandingofthelimitationsofthecurrentstateoffinancialtheoryinmakingstrategicbusinessdecisionsSkills
4.Applied the key valuation concepts and methodologies of financial decision making in order tocontribute to the wider decision making of theorganisationAssessmentCriteriaYour seminar tutor on the basis ofthe following generic criteria will assess thepaper:Assessment Regulations For further information regarding Assessment Regulations,extenuating circumstances or extensions and academic integrity, please refer to your Programme Handbook on the University of Sunderland in London information page onCanvas.ReadingListPlease access your reading list from the library website. To access it, please go to https://moduleresources.sunderland.ac.uk/ and search for yourmodule.
SubmissionguidelinesThere are currently two steps that you need to follow to ensure that you successfully submit your work for marking. Your submission links will becomeavailable approximately 3 weeks prior to your submission deadline, along with detailed instructions on how to submit your assignment, but in the
meantimepleasefeelfreetoalsowatchthisAssignmentSubmissionInstructionsvideo.GradingYou will be marked in accordance to the University of Sunderland assessment criteria attached below. The assessment criteria covers; Relevance, Knowledge, Analysis, Argument andStructure, Critical Evaluation, Presentation, Reference toLiterature.