Financial Management Assignment
The assignment is designed to test your knowledge and understanding in financial management & corporate finance module and the ability to apply the learning to a real situation.
The assignments:
1. Victory Ltd is a manufacturing company wishing to expand their operations. The directors have planned to finance the expansion program by raising the required funds from existing shareholders through a 1-for-5 rights issue. The most recent summarized income of the business is as follows:
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RM in millions
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Sales Revenue
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200
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Operating profit
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25
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Less interest
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-5
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Profit before taxation
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20
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Less taxation
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-4
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Profit for the Year
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15
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A RM3m ordinary dividends have already been paid for the year.
The share capital consists of 150m ordinary shares with a par value of RM1 a share. These are currently being traded on the Stock market at a price earnings (P/E) ratio of 20 times and the board of directors have decided to issue the new shares at a discount of 15% on the current market value.
You are required to:
a) Discuss the significance of the right mixture of capital for an organization.
b) Calculate the theoretical ex-rights price of an ordinary share in Victory Ltd.
c) Calculate the price at which the rights in Victory Ltd are likely to be traded.
d) Give a brief description of five methods of raising funds and discuss their advantages and disadvantages.
2. Transparent view Plc. develops advance solutions to help transport operators during foggy conditions. The company is considering various investment projects that should help improve their services. They have shortlisted three projects and asked you, as a company investment analyst, to recommend the best option. They have provided you with following information regarding the projects:
i) Project I will last for 3 years. The initial expenditure is RM300,000 and the expected cash flow originating from the project is RM150,000 for the first 2 years of the project and RM50,000 in the last year of the project life.
ii) Project II will last for 3 years. The initial outlay is RM250,000 and the expected annual cash flow originating from the project is RM150,000 for the project life
iii) Project III will last for 4 years. The outlays are estimated RM300,000 and the expected cash flow originating from the project is RM100,000 in the first year and then increase by RM50,000 in year 2, 3 and 4.
Current cost of capital is 20%.
You are required to:
(a) Evaluate the three projects using:
(i) Payback Period
(ii) Accounting rate of return (ARR)
(iii) Net Present Value (NPV)
(iv) Internal rate of return (IRR)
(b) Explain, which projects should be accepted and why.
(c) Discuss the factors management would need to consider in addition to the financial factors before making a final decision on a project.
This assignment comprises a part of the investment analyst's tasks, to be incorporated into the required report format of 4,000 words (maximum) as follows:
Introduction -
Task 1: The significance of the right composition of capital and investment decisions together with the objectives of the assignment (about 350-450 words).
Main Body -
Task 2: What you understand by the term capital structure and what construes an optimum capital structure.
Task 3: What are rights issues and how does an organization derive at the theoretical ex-rights price to charge for the rights to be issued.
Task 4: The calculations involved in arriving at the price the rights issued would be traded.
Task 5: A critical discussion on any five methods of raising capital.
Task 6: Evaluation techniques of investment appraisal, using the information provided, including the justification for the project to be chosen , under each technique used.
Task 7: Discuss the factors a management should consider in addition to the financial factors before making a final decision on a project. (about 3100-3300 words).
Conclusion and Recommendations -
Highlight key findings, conclusions and recommendations arrived at the financial management decisions above, with reference to the specific information provided in the assignment, including a critical evaluation of the tasks 2-7 together with limitations , if any.. (about 350-450 words)
References -
You are required to reference research annual reports, books, journals articles, relevant magazines, newspapers and any relevant online websites used in the report. The Harvard Referencing styleMUSTbe used in both the in- text and end of text citations and references.