Stock Market Efficiency and Trading Strategy

This assignment examines the stock market efficiency of Reverlea by analyzing its share price fluctuations leading up to an announcement. It suggests short-selling as a profitable strategy due to anticipated price increases stemming from positive news. The analysis concludes that Reverlea's stock market reflects semi-strong efficiency and can be leveraged for investor gains through informed trading.

Running head: CORPORATE FINANCE ASSIGNMENT
Corporate Finance Assignment
Name of the Student:
Name of the University:
Authors Note:

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CORPORATE FINANCE ASSIGNMENT
Executive Summary:
The overall report mainly focuses on identifying proposed production of
confectionery that needs to be conducted by Riverlea. Furthermore, there are different types
of situations that is used in the report, which could be helpful in identifying the viability of
the new project. Adequate sensitivity analysis is conducted to detect whether the project's
viability could be attained even after the revenue decline or increases in future. There are
different types of calculation that are conducted for the project starting from detection of cost
of capital, which was used for calculating relevant NPV of the project. After which adequate
valuation of investment appraisal techniques such as discounted payback period, payback
period and internal rate of return are conducted to detect viability of the project. Moreover,
the calculation is conducted on different scenarios to detect viability of the project, which is
identified to be a viable approach. Therefore, it is recommended for the organisation to
adequately start the production of confectioneries for generating higher revenue in future, as
evaluated by the investment appraisal techniques.
Adequate findings are been conducted to detect the overall impact of the future cash
flows that would be generated from the project. In addition, with the help of relevant graphs
projected increment and actual increment are mainly evaluated to detect the relevant increase
of share price. Furthermore, share price valuation on both adverse and positive circumstances
is relatively evaluated to determine actual change in share price of the organisation.
Therefore, the shares reflect semi strong efficiency market, which could be used by investors
to adequately improve their return from investment. Moreover, the use of short selling
strategy could eventually help in increasing relevant revenue for the investor from the price
movement of Reverlea.

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Table of Contents
Part 1:.........................................................................................................................................3
1. Introduction:...........................................................................................................................3
2. Findings:.................................................................................................................................3
2.1 The Discounted Rate:...........................................................................................................3
2.2 Evaluation of the expected cash flows:................................................................................5
2.3 Sensitivity Analysis:.............................................................................................................7
2.3.1 Evaluation of the expected cash flow with 40% probability of 40% lowers incremental
revenues:....................................................................................................................................7
2.3.2 Evaluation of the expected cash flow with 10% probability of 20% higher incremental
revenues:....................................................................................................................................9
3. Concussion and Recommendations:....................................................................................11
Part 2:.......................................................................................................................................11
1. Introduction:.........................................................................................................................11
2. Findings:...............................................................................................................................12
2.1 Detecting whether the stock is semi-strong efficiency:.....................................................12
2.2 Depicting the trading strategy:...........................................................................................14
3. Concussion and Recommendations:....................................................................................14
Reference and Bibliography:....................................................................................................16

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Part 1:
1. Introduction:
The overall report mainly focuses on identifying proposed production of
confectionery that needs to be conducted by Riverlea. Furthermore, there are different types
of situations that is used in the report, which could be helpful in identifying the viability of
the new project. Adequate sensitivity analysis is conducted to detect whether the project's
viability could be attained even after the revenue decline or increases in future. This could
eventually help and depicting viability of the project.
2. Findings:
2.1 The Discounted Rate:
Particulars Value
Rf 5.05%
Beta 1.56
Rm 9.22%
CAPM 11.55%
The above table mainly helps in identifying the overall discounting rate that needs to
be calculated to derive calculation of the calculations of NPV. The relevance CA p.m.
evaluation is mainly conducted to identify the discounting rate, where risk free rate is
identified at 5.05%, while the market return is calculated at 9.22% and beta is detected at
1.56. This overall valuation mainly helps in identifying the discounting rate of 11.55%,

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which could be used in evaluating the viability of the project. Baum and Crosby (2014)
mentioned that companies use the discounting rate to derive the discounted cash flow which
could be used in identifying the project viability.

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CORPORATE FINANCE ASSIGNMENT
2.2 Evaluation of the expected cash flows:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,288,408 $1,417,249 $1,558,974 $1,714,871 $1,886,358
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(435,363) $(486,900) $(543,589) $(605,948) $(674,543)
Increase in Depreciation $(300,000) $(240,000) $(192,000) $(153,600) $(122,880) $(98,304) $(78,643) $(62,915) $(50,332) $(40,265)
Profit on Sale $200,000
Taxable Income $60,000 $168,000 $268,800 $365,280 $459,888 $554,741 $651,706 $752,470 $858,591 $1,171,550
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,288,408 $1,417,249 $1,558,974 $1,714,871 $1,886,358
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(435,363) $(486,900) $(543,589) $(605,948) $(674,543)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(18,000) $(50,400) $(80,640) $(109,584) $(137,966) $(166,422) $(195,512) $(225,741) $(257,577) $(351,465)
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $476,623 $524,837 $579,643 $641,345 $1,000,350
Cumulative cash flow $(1,418,000) $(1,086,000) $(738,400) $(368,240) $31,056 $465,858 $942,480 $1,467,318 $2,046,961 $2,688,306 $3,688,656
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $476,623 $524,837 $579,643 $641,345 $1,000,350
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $297,624 $279,345 $266,674 $257,879 $251,735 $247,376 $244,196 $241,771 $239,809 $335,318
Cumulative cash flow $(1,452,376) $(1,154,751) $(875,406) $(608,732) $(350,853) $(99,118) $148,258 $392,453 $634,224 $874,033 $1,209,351
NPV 911,726$
IRR 21.07%
Payback (years) 3.92
Discounted Payback (years) 5.40
Taxable Income
Cash Flows
Present value of Cashflows

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The above figure mainly helps in identifying the overall viability of the project, where relevant investment appraisal techniques are used
such as NPV, IRR, payback period, and discounted payback period to detect viability of the project. Under normal circumstances the overall
project mainly provides a NPV of $911,726, which is relatively positive and detect viability of the investment. Furthermore, the internal rate of
return is identified to be 21.07 %, which is relatively higher than the cost of capital 11.55%. This mainly indicates that the overall returned from
the investment is relatively higher, which could allow the organisation to reinvest the cash on another project and increase their return. The
normal payback period is mainly calculated at 3.9 years, while the discounted payback period States 5.4 years. The overall evaluation of
Payback period mainly detect that the whole capital is collected before completion of the project, which is a viable approach for the organisation.
Hence, investment in the project could eventually allow Riverlea to generate higher return from investment. In this context, Gotze, Northcott and
Schuster (2016) stated that use of adequate investment appraisal technique allows organisation to detect the most viable project, which could
increase firm value in future.

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2.3 Sensitivity Analysis:
2.3.1 Evaluation of the expected cash flow with 40% probability of 40% lowers incremental revenues:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,082,263 $1,190,489 $1,309,538 $1,440,492 $1,584,541
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(352,905) $(396,196) $(443,815) $(496,197) $(553,816)
Increase in Depreciation $(300,000) $(240,000) $(192,000) $(153,600) $(122,880) $(98,304) $(78,643) $(62,915) $(50,332) $(40,265)
Profit on Sale $200,000
Taxable Income $60,000 $168,000 $268,800 $365,280 $459,888 $431,054 $515,650 $602,808 $693,963 $990,459
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,082,263 $1,190,489 $1,309,538 $1,440,492 $1,584,541
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(352,905) $(396,196) $(443,815) $(496,197) $(553,816)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(18,000) $(50,400) $(80,640) $(109,584) $(137,966) $(129,316) $(154,695) $(180,842) $(208,189) $(297,138)
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $390,042 $429,598 $474,880 $526,106 $873,587
Cumulative cash flow $(1,418,000) $(1,086,000) $(738,400) $(368,240) $31,056 $465,858 $855,899 $1,285,497 $1,760,378 $2,286,484 $3,160,071
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $390,042 $429,598 $474,880 $526,106 $873,587
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $297,624 $279,345 $266,674 $257,879 $251,735 $202,439 $199,883 $198,074 $196,719 $292,826
Cumulative cash flow $(1,452,376) $(1,154,751) $(875,406) $(608,732) $(350,853) $(99,118) $103,320 $303,203 $501,277 $697,997 $990,823
NPV 693,199$
IRR 19.31%
Payback (years) 3.92
Discounted Payback (years) 5.49
Taxable Income
Cash Flows
Present value of Cashflows

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The evaluation of the project under lower revenues also indicates a positive viability, which could allow the organisation to generate
higher returns in future. The NPV valuation of the project under low revenue is $693,199, which is relatively positive and indicates a viable
approach for the organisation. Moreover, the internal rate of return is also 19.31% and higher than the cost of capital indicating quick generation
of cash that could be used by the organisation. Lastly the payback period is calculated at 3.9 years, while the discounted payback period is
detected to be at 5.5 years, which is relatively higher than normal circumstances. Hence, under lower revenue the project of producing
confectionery is a viable approach for Riverlea. On the contrary, Almarri and Blackwell (2014) argued that without adequate evaluation
companies should not use the cost of capital, as it might project a wrong valuation of the investment and might decrease the anticipated returns.

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2.3.2 Evaluation of the expected cash flow with 10% probability of 20% higher incremental revenues:
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,314,176 $1,445,594 $1,590,153 $1,749,168 $1,924,085
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(445,670) $(498,238) $(556,061) $(619,667) $(689,634)
Increase in Depreciation $(300,000) $(240,000) $(192,000) $(153,600) $(122,880) $(98,304) $(78,643) $(62,915) $(50,332) $(40,265)
Profit on Sale $200,000
Taxable Income $60,000 $168,000 $268,800 $365,280 $459,888 $570,202 $668,713 $771,177 $879,169 $1,194,186
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Net increase in Revenue $800,000 $880,000 $968,000 $1,064,800 $1,171,280 $1,314,176 $1,445,594 $1,590,153 $1,749,168 $1,924,085
Net decrease in revenue $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000) $(200,000)
Net increase in Cost $(240,000) $(272,000) $(307,200) $(345,920) $(388,512) $(445,670) $(498,238) $(556,061) $(619,667) $(689,634)
Cost of Machinery $(1,500,000)
Installation and shipping cost $(200,000)
Salvage Value $200,000
Increase in Working Capital $(50,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $140,000
Tax $(18,000) $(50,400) $(80,640) $(109,584) $(137,966) $(171,061) $(200,614) $(231,353) $(263,751) $(358,256)
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $487,445 $536,742 $592,739 $655,750 $1,016,195
Cumulative cash flow $(1,418,000) $(1,086,000) $(738,400) $(368,240) $31,056 $465,858 $953,303 $1,490,045 $2,082,784 $2,738,534 $3,754,730
Item/Year 0 1 2 3 4 5 6 7 8 9 10
Cash Flows $(1,750,000) $332,000 $347,600 $370,160 $399,296 $434,802 $487,445 $536,742 $592,739 $655,750 $1,016,195
Discounting Factor (@11.55%) 1.0000 0.8965 0.8036 0.7204 0.6458 0.5790 0.5190 0.4653 0.4171 0.3739 0.3352
Present value of Cashflows $(1,750,000) $297,624 $279,345 $266,674 $257,879 $251,735 $252,993 $249,735 $247,233 $245,195 $340,629
Cumulative cash flow $(1,452,376) $(1,154,751) $(875,406) $(608,732) $(350,853) $(99,118) $153,875 $403,609 $650,843 $896,038 $1,236,667
NPV 939,042$
IRR 21.28%
Payback (years) 3.92
Discounted Payback (years) 5.39
Taxable Income
Cash Flows
Present value of Cashflows

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Moreover, evaluation of the project under higher revenue directly portrays a positive NPV of $939,042 with an IRR of 21.28%. This
directly indicates the overall viability of the project, which could be obtained by Riverlea. Moreover the payback period is detected to be 3.9
years, while the discounted payback period is directed to be 5.4 years, which is relatively quicker than the normal circumstances. This directly
indicates that incremental revenue could also provide higher returns to the company, we improve its revenue retention capacity. Hence, it could
be identified that the project has viable approach, which might improve return from investment and allow the organisation to attain sustainable
growth. On the other hand, Eliasson and Börjesson (2014) criticises that increment in inflation rate could directly have a negative impact on the
returns provided by the project, which needs to be evaluated by the company before initiating the investment.

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3. Concussion and Recommendations:
From the evaluation of the above calculation viability of the project for producing
confectioneries can be detected. There are different types of calculation that are conducted for
the project starting from detection of cost of capital, which was used for calculating relevant
NPV of the project. After which adequate valuation of investment appraisal techniques such
as discounted payback period, payback period and internal rate of return are conducted to
detect viability of the project. Moreover, the calculation is conducted on different scenarios to
detect viability of the project, which is identified to be a viable approach. This directly
indicates that all the valuation conducted for the project has provided a positive view and
could allow the organisation to commence with the project. Hence, Riverlea could commence
with the production of confectioneries, which might help in improving future revenues of the
organisation.
Therefore, it is recommended for the organisation to adequately start the production
of confectioneries for generating higher revenue in future, as evaluated by the investment
appraisal techniques.
Part 2:
1. Introduction:
Adequate evaluation of share price movement is mainly conducted of Riverlea, where
the impact of the expected income generated by the company could be seen in its share price.
Adequate findings are been conducted to detect the overall impact of the future cash flows
that would be generated from the project. In addition, with the help of relevant graphs
projected increment and actual increment are mainly evaluated to detect the relevant increase

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of share price. Furthermore, share price valuation on both adverse and positive circumstances
is relatively evaluated to determine actual change in share price of the organisation.
2. Findings:
2.1 Detecting whether the stock is semi-strong efficiency:
-5 1.20$ 1.20$ 1.20$
-4 1.23$ 1.23$ 1.23$
-3 1.16$ 1.16$ 1.16$
-2 1.20$ 1.20$ 1.20$
-1 2.16$ 2.16$ 2.16$
0 4.35$ 2.85$ 3.10$
1 4.27$ 2.85$ 3.10$
2 4.32$ 2.85$ 3.10$
3 4.25$ 2.85$ 3.10$
4 4.18$ 2.85$ 3.10$
5 4.25$ 2.85$ 3.10$
Expected Stock
Price movement
under Revenue
Increasing
Day
Actual Stock
Price movement
of Riverlea
Expected Stock
Price movement
under Revenue
Decreasing
-5 1.20$ 1.20$
-4 1.23$ 1.23$
-3 1.16$ 1.16$
-2 1.20$ 1.20$
-1 2.16$ 2.16$
0 4.35$ 3.07$
1 4.27$ 3.07$
2 4.32$ 3.07$
3 4.25$ 3.07$
4 4.18$ 3.07$
5 4.25$ 3.07$
Day
Actual Stock
Price movement
of Riverlea
Expected Stock
Price Movement

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-5 -4 -3 -2 -1 0 1 2 3 4 5
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00 Predicted Share Price Movement under Sensitivity Analysis
Actual Stock Price movement of
Riverlea
Expected Stock Price movement
under Revenue Decreasing Scenario
Expected Stock Price movement
under Revenue Increasing Scenario
Days Relative to the Date of Announcement
Share Price
The above graphs and tables depict the relevant increment in share price of Reverlea,
which is obtained during the announcement off the excess income that will be generated from
the operation. For the more, from the evaluation it could be identified that market has reacted
adequately on day 01, where 101% can be seen from the share price level of day 0. This
directly indicates that the market have instantly reacted to the information regarding
increased profits in future. According to the valuation that has been conducted in part 1 the
overall increment and shares should only be around $3.10, whereas the share rose of $4.35 in
Overeaction

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CORPORATE FINANCE ASSIGNMENT
day 01. This indicates that the shareholders have overestimated the value that would actually
be generated from the increased revenue (Bodie 2013).
However, from the valuation of the price movement it could be identified that after
day 01 till day 05 the share price as a relatively hovered between +2% and -2%. This directly
indicates that share price correction is in progress and is taking relevant time. Hence it could
be identified that semi strong efficient market is taking a relevant longer time to correct the
overall valuation of company’s share price. Furthermore, from the valuation it could also be
identified that from day -5 to day 0 share price of your organisation rules exponential.
Moreover the relevant impact could be seen from day -2 to day -1, where relevant increment
of 80% in share value can be detected. This directly indicates that relevant private
information has been leaked, which resulted in a leap in share price. This directly indicates
that the share is influenced by a strong form of efficient market (Liu, Wu and Yang 2017).
2.2 Depicting the trading strategy:
Short selling is mainly an adequate option for an investor as relevant incremental in
share price can be seen due to announcements for higher revenue. Selling the share on day 0
and buying back on day 5 could eventually help in generating a return of 2.30% from the
investment. However, from the valuation the share price should go till $3.10, where the
profits will be around 28.76% in total. Therefore, adopting a short selling strategy could
eventually allow the investors to generate higher return from investment for short duration
(Hamid et al. 2017).
3. Concussion and Recommendations:
From the evaluation, it could be identified that shares of Reverlea have strong form of
market efficiency, which led to the increment of share price. Therefore, the shares reflect

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semi strong efficiency market, which could be used by investors to adequately improve their
return from investment. Moreover, the use of short selling strategy could eventually help in
increasing relevant revenue for the investor from the price movement of Reverlea.

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Reference and Bibliography:
Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for
PPP procurement success in large green projects. Procedia-Social and Behavioral
Sciences, 119, pp.847-856.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Bodie, Z., 2013. Investments. McGraw-Hill.
Eliasson, J. and Börjesson, M., 2014. On timetable assumptions in railway investment
appraisal. Transport Policy, 36, pp.118-126.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-
VERLAG BERLIN AN.
Hamid, K., Suleman, M.T., Ali Shah, S.Z., Akash, I. and Shahid, R., 2017. Testing the weak
form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.
Lasrado, C. and Rao, T.N., 2017. Analysis of Stock Price Behaviour around Bonus Issue: A
Test of Semi-Strong Efficiency of Indian Capital Market. DHARANA-Bhavan's International
Journal of Business, 3(1), pp.18-31.
Liu, H., Wu, J. and Yang, Q., 2017. Inside Trading when the Market Deviates from the Semi-
strong Efficient Condition. ANNALS OF ECONOMICS AND FINANCE, 18(1), pp.111-128.
Venables, A., Laird, J.J. and Overman, H.G., 2014. Transport investment and economic
performance: Implications for project appraisal.
Vesty, G. and Oliver, J., 2014. Corporate strategy and accounting for sustainability in
investment appraisal. Corporate Ownership and Control, 11(2D), pp.377-388.