Corporate Financial Management

The assessment analyzes Tastegood ltd's business proposal to supply confectionery products to Cheap & Good Supermarket chain. The analysis considers two scenarios and abnormal returns of the business. The proposal is shown to be favorable in scenario 2 and consistent with semi-strong form of market efficiency.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of University:
Author’s Note:

1
CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Part 1............................................................................................................................................2
Cash Flow Analysis under both Scenario....................................................................................2
Part 2............................................................................................................................................5
Analysis of Semi-Strong Form of Market Efficiency..................................................................5
Conclusion.......................................................................................................................................6
Reference.........................................................................................................................................7
Appendix..........................................................................................................................................9

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CORPORATE FINANCIAL MANAGEMENT
Introduction
The main purpose of this assessment is to analyze the business of Tastegood ltd which is
planning to enter into an agreement to supply its confectionery in a private label to Cheap &
Good which is a supermarket chain. This agreement is anticipated to increase the production
requirement of the business and also the earning capacity of the business. The assessment
analyses two different scenarios which is anticipated by the business of Tastegood ltd and on the
basis of the results of the analysis decisions regarding whether to accept the proposal or not.
Another part of the assessment considers the stock price returns of the business of Tastegood ltd
and whether the same are consistent with the analysis which is conducted in the first part. The
second part analysis the abnormal returns of the business and how the business can take
advantage of the same (Hirshleifer, Hsu and Li 2013). The stock prices which are provided are to
be analyzed on the basis of returns generated from the same.
Discussion
Part 1
Cash Flow Analysis under both Scenario
As per the situation, Tastegood ltd is planning to enter into an agreement for supply of
confectionery products to Cheap & Good Supermarket chain and the management of the
company anticipated two scenarios where in the incremental revenue of the business will be 40%
lower for, year six onwards and the second scenario anticipates that the incremental revenue
would be 20% higher from year six onwards. The analysis is considered for a period of 10 years
in order to derive appropriate data from the analysis for the purpose of taking decisions.
Scenario 1

3
CORPORATE FINANCIAL MANAGEMENT
In order to meet the production requirements under the proposal. The business would be
needing to set up a new machinery which is anticipated to cost $ 2,600,000 with an installation
charges of $ 200,000. The depreciation on the machinery is charged on written down value
method over the period of 10 years. As per the case, which is presented in Scenario 1, the net
incremental earnings for the first year is shown to be in negative which gradually improves from
the second year as shown in the table 1 presented in Appendix section. As per Scenario 1, the
incremental earnings of the business are anticipated to fall from the 6th year as per the
anticipation of the management. The net cash flows of the business are shown to be have fallen
drastically in case of this scenario (Cakici, Fabozzi and Tan 2013). The net cash flows are shown
to be positive for all the years except the first year which is a positive sign for the business. On
the basis of the cash inflows which is computed under the Scenario 1, the NPV for the proposal
is computed and the same show negative results which is shown to be $ 464,882. The proposal is
not shown to be favorable under this scenario as the NPV is shown to be negative which shows
that the project would not be profitable under this scenario (Merło 2013). On the other hand, the
IRR of the project, Profitability is shown to be favorable which is a good sign. The payback
period analysis shows that it would take 7.33 years to cover the outflows of the projects.
Scenario 2
Under this Scenario, the management of Tastegood ltd anticipates that the incremental
revenue which is generated by the business would further increase from 6th year onwards by
20%. This is a situation where the management anticipates that the project would be a success
and the same would enhance in later years. The investments which is made by the business in
machinery is same and the initial outflow is also similar. The incremental revenue which is
generated by the business is shown to be on a constant rise from year 6 onwards and this

4
CORPORATE FINANCIAL MANAGEMENT
indicates further success in the business of Tastegood ltd. The net cash flows are shown to be
positive for all the 10 years and the same is shown to be on the rise from year 6 onwards. The
NPV which is computed on the basis of the estimated net cash flow is shown to be $ 355,238
which is a positive figure and signifies that the project has the potential to earn significant
amount of profits for the business in future. The other standards such as profitability index, IRR
and payback period of the project under this scenario is also shown to be favorable which shows
that the project is worth making investment (Bas 2013). The payback period which is computed
under this scenario is shown to be 6.14 years which has reduced significantly which shows a
favorable sign for the business.
On a normal circumstance also, the project shows a positive NPV which is a clear sign
that the proposal is viable for business point of view. It is to be noted that the computation of the
NPV is done considering the discounting rate of 11.5388% for which the computation is shown
in Table 4 in Appendix. The computation shows that return factors such as market rate of return,
stock return is considered and also significant computation is also shown for the same in the
appendix section. In addition to this, there are also further assumptions taken for the purpose of
investment appraisal of the projects which the business of Tastegood ltd is considering such as
the revenue which is generated from the business is on an assumption basis and also the scenario
which is considered are also on the estimation basis which is largely depended on the market and
other factors which affect the revenue generating capabilities of the business (Azzheurova and
Bessonova 2015). In addition to this, it is also assumed that no major fluctuation takes place in
the stocks prices of the business.
Thus, from the discussion which is shown above, the management of Tastegood ltd
should proceed forward with the proposal of supply of confectionery products to Cheap & Good

5
CORPORATE FINANCIAL MANAGEMENT
Supermarket chain. The project is shown to be favourable in normal situation and also in
scenario 2 while the management needs to avoid scenario 1 which is also a probability. In
Scenario 1, the project would not be profitable and the business can incur significant losses and
therefore the management needs to consider this probability as well in decision making process.
Part 2
Analysis of Semi-Strong Form of Market Efficiency
The abnormal returns of the business reveal the return which a business earns above the
expected return of the business. The table which is portrayed in the appendix section clearly
shows that the business starts to earn abnormal returns 1 day before the announcement of the
proposal of the business (Mallikarjunappa and Dsouza 2013). After the announcement, the
returns which is generated by the business is much more than the expected return which is
anticipated by the business which shows significant abnormal returns for the business (Degutis
and Novickytė 2014). The stock prices of the business are affected by the announcement of the
proposal of the business which effectively shows that the stock prices clearly demonstrate the
stock prices effectively reflects all public information (Rizvi et al. 2014). Therefore, it can be
said that the stock prices of the business are consistent with the semi-strong form of market
efficiency as the stock prices adjust quickly with the announcement of the business plan of the
Tastegood ltd.
As per the analysis which is shown in Part 1, the management of the company had
anticipated that the new proposal of supplying confectionery products to Cheap & Good
Supermarket chain would result in an increase surge of demands for the products of Tastegood
ltd and therefore the management of the company installed new machinery to meet the demand.
The management of the company also anticipated that the cash inflows would increase and so

6
CORPORATE FINANCIAL MANAGEMENT
will the profitability of the business (Hirshleifer, Hsu and Li 2013). Therefore, the stock returns
of the business is anticipated to increase and therefore the abnormal returns confirm with the
analysis which is conducted in Part 1.
On the basis of the increase in the returns of the business, the management of the
company needs to issue more stock in order to raise more capital and increase the shareholders
base which can result in growth in the operations of the business (Bessembinder and Zhang
2013). The management also can take advantage of the market valuation in order to enter new
contracts and further expand the business. As the event window closes, the return on stock would
also fall from abnormal returns and be more like normal returns from the stocks of the business.
The return on stock would stabilize as the event window closes.
Conclusion
The above discussion clearly shows that the management should move forward with its
plan of supplying confectionery products to Cheap & Good Supermarket chain as the same
results in more profitability for the business and also the business able to generate abnormal
return on stock which forward reflect the performance of the business. The second part also
shows that the return which is generated by the business is consistent with semi-strong form of
market efficiency.

7
CORPORATE FINANCIAL MANAGEMENT
Reference
Azzheurova, K.E. and Bessonova, E.A., 2015. Development of methods for analysis and
assessment of the efficiency of regional investment projects seeking state
support. Mediterranean Journal of Social Sciences, 6(5), p.362.
Bas, E., 2013. A robust approach to the decision rules of NPV and IRR for simple
projects. Applied Mathematics and Computation, 219(11), pp.5901-5908.
Bessembinder, H. and Zhang, F., 2013. Firm characteristics and long-run stock returns after
corporate events. Journal of Financial Economics, 109(1), pp.83-102.
Cakici, N., Fabozzi, F.J. and Tan, S., 2013. Size, value, and momentum in emerging market
stock returns. Emerging Markets Review, 16, pp.46-65.
Degutis, A. and Novickytė, L., 2014. The efficient market hypothesis: a critical review of
literature and methodology. Ekonomika, 93(2).
Hirshleifer, D., Hsu, P.H. and Li, D., 2013. Innovative efficiency and stock returns. Journal of
Financial Economics, 107(3), pp.632-654.
Mallikarjunappa, T. and Dsouza, J.J., 2013. A Study of Semi-Strong Form of Market Efficiency
of Indian Stock Market. Amity Global Business Review, 8.
Merło, P., 2013. Implications of discounting methods and relations between NPV, IRR and
MIRR for efficiency evaluation of investment projects. Humanities and Social Sciences 2013,
p.103.

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CORPORATE FINANCIAL MANAGEMENT
Rizvi, S.A.R., Dewandaru, G., Bacha, O.I. and Masih, M., 2014. An analysis of stock market
efficiency: Developed vs Islamic stock markets using MF-DFA. Physica A: Statistical
Mechanics and its Applications, 407, pp.86-99.

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CORPORATE FINANCIAL MANAGEMENT
Appendix
Table 1
Years 0 1 2 3 4 5 6 7 8 9 10
Initial Cost of
Machinery
$
2,600,0
00.00
Initial Installation and
Shipping Costs
$
200,00
0.00
Depreciation @20%
(Diminishing Value
Method)
$560
,000
$448
,000
$358
,400
$286
,720
$229
,376
$18
3,50
1
$14
6,80
1
$11
7,44
1
$93,
952
$75,
162
Closing Book Value of
Machinery
$2,2
40,0
00
$1,7
92,0
00
$1,4
33,6
00
$1,1
46,8
80
$917
,504
$73
4,00
3
$58
7,20
3
$46
9,76
2
$375
,810
$300
,648
Salvage Value
$200
,000
Loss on sale of
Machinery
-
$100
,648
Years 0 1 2 3 4 5 6 7 8 9 10
Initial Cost of
Machinery (Outlay)
-
$2,600,
000
Initial Installation and
Shipping Costs
-
$200,00
0
Incremental Operating
Revenue
$800
,000
$880
,000
$968
,000
$1,0
64,8
00
$1,1
71,2
80
$77
3,04
5
$85
0,34
9
$93
5,38
4
$1,0
28,9
23
$1,1
31,8
15
Increamental
Operating Cost
(Variable)
-
$320
,000
-
$352
,000
-
$387
,200
-
$425
,920
-
$468
,512
-
$30
9,21
8
-
$34
0,14
0
-
$37
4,15
4
-
$411
,569
-
$452
,726
Annual Depreciation
-
$560
,000
-
$448
,000
-
$358
,400
-
$286
,720
-
$229
,376
-
$18
3,50
1
-
$14
6,80
1
-
$11
7,44
1
-
$93,
952
-
$75,
162
Loss on Sale of
Machinery
-
$100
,648
Opportunity Cost
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$20
0,00
0
-
$20
0,00
0
-
$20
0,00
0
-
$200
,000
-
$200
,000

10
CORPORATE FINANCIAL MANAGEMENT
Operating Cost would
Reduce
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
Taxable Income
-
$200
,000
-
$40,
000
$102
,400
$232
,160
$353
,392
$16
0,32
6
$24
3,40
9
$32
3,79
0
$403
,401
$383
,279
Tax (30%)
-
$60,
000
-
$12,
000
$30,
720
$69,
648
$106
,018
$48,
098
$73,
023
$97,
137
$121
,020
$114
,984
Incremental Earnings
-
$140
,000
-
$28,
000
$71,
680
$162
,512
$247
,374
$11
2,22
8
$17
0,38
6
$22
6,65
3
$282
,381
$268
,296
Add Back Depreciation
$560
,000
$448
,000
$358
,400
$286
,720
$229
,376
$18
3,50
1
$14
6,80
1
$11
7,44
1
$93,
952
$75,
162
Less Increases in Net
Working Capital
-
$50,000
Less Capital
Expenditures
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
Add Back Recovery of
Net Working Capital
$140
,000
Salvage Cash Flow
$200
,000
Net Cash flows
-
$2,850,
000
$410
,000
$410
,000
$420
,080
$439
,232
$466
,750
$28
5,72
9
$30
7,18
7
$33
4,09
4
$366
,333
$784
,105
Table 2
Years 0 1 2 3 4 5 6 7 8 9 10
Initial Cost of
Machinery
$
2,600,0
00.00
Initial Installation and
Shipping Costs
$
200,00
0.00
Depreciation @20%
(Diminishing Value
Method)
$560
,000
$448
,000
$358
,400
$286
,720
$229
,376
$183
,501
$146
,801
$117
,441
$93,
952
$75,
162
Closing Book Value of
Machinery
$2,2
40,0
00
$1,7
92,0
00
$1,4
33,6
00
$1,1
46,8
80
$917
,504
$734
,003
$587
,203
$469
,762
$375
,810
$300
,648
Salvage Value
$200
,000
Loss on sale of
Machinery
-
$100
,648

11
CORPORATE FINANCIAL MANAGEMENT
Years 0 1 2 3 4 5 6 7 8 9 10
Initial Cost of
Machinery (Outlay)
-
$2,600,
000
Initial Installation and
Shipping Costs
-
$200,00
0
Incremental
Operating Revenue
$800
,000
$880
,000
$968
,000
$1,0
64,8
00
$1,1
71,2
80
$1,5
46,0
90
$1,7
00,6
99
$1,8
70,7
68
$2,0
57,8
45
$2,2
63,6
30
Increamental
Operating Cost
(Variable)
-
$320
,000
-
$352
,000
-
$387
,200
-
$425
,920
-
$468
,512
-
$618
,436
-
$680
,279
-
$748
,307
-
$823
,138
-
$905
,452
Annual Depreciation
-
$560
,000
-
$448
,000
-
$358
,400
-
$286
,720
-
$229
,376
-
$183
,501
-
$146
,801
-
$117
,441
-
$93,
952
-
$75,
162
Loss on Sale of
Machinery
-
$100
,648
Opportunity Cost
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
-
$200
,000
Operating Cost would
Reduce
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
$80,
000
Taxable Income
-
$200
,000
-
$40,
000
$102
,400
$232
,160
$353
,392
$624
,153
$753
,618
$885
,021
$1,0
20,7
55
$1,0
62,3
68
Tax (30%)
-
$60,
000
-
$12,
000
$30,
720
$69,
648
$106
,018
$187
,246
$226
,086
$265
,506
$306
,226
$318
,710
Incremental Earnings
-
$140
,000
-
$28,
000
$71,
680
$162
,512
$247
,374
$436
,907
$527
,533
$619
,514
$714
,528
$743
,658
Add Back
Depreciation
$560
,000
$448
,000
$358
,400
$286
,720
$229
,376
$183
,501
$146
,801
$117
,441
$93,
952
$75,
162
Less Increases in Net
Working Capital
-
$50,000
Less Capital
Expenditures
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
-
$10,
000
Add Back Recovery of
Net Working Capital
$140
,000
Salvage Cash Flow
$200
,000
Net Cash flows
-
$2,850,
000
$410
,000
$410
,000
$420
,080
$439
,232
$466
,750
$610
,408
$664
,334
$726
,955
$798
,481
$1,2
59,4
67
Table 3

12
CORPORATE FINANCIAL MANAGEMENT
Calculation for NPV, IRR, Payback Period,
PVI and NPVI
Initial Cash
flows Scenario 1 Scenario 2
Outlay
$
(2,850,000.00
)
$
(2,850,000.00
)
$
(2,850,000.
00)
year 1
$
410,000.00
$
410,000.00
$
410,000.00
year 2
$
410,000.00
$
410,000.00
$
410,000.00
year 3
$
420,080.00
$
420,080.00
$
420,080.00
year 4
$
439,232.00
$
439,232.00
$
439,232.00
year 5
$
466,750.00
$
466,750.00
$
466,750.00
year 6
$
502,181.00
$
285,759.00
$
610,408.00
year 7
$
545,284.00
$
307,187.00
$
664,334.00
year 8
$
596,001.00
$
334,094.00
$
726,955.00
year 9
$
654,431.00
$
366,333.00
$
798,481.00
year 10
$
1,101,013.00
$
784,105.00
$
1,259,467.0
0
Discounting Rate
(11.5388 %)
Net Present Value
(NPV)
$
81,858.03 -$464,882 $355,238
Internal Rate of
Return (IRR) 12.13% 7.56% 13.96%
Payback Period 6.37 7.33 6.14
Present Value Index
(PVI) 1.9456 1.4819 2.1774
Net Present Value
Index(NPVI) 0.9456 0.4819 1.1774
Table 4

13
CORPORATE FINANCIAL MANAGEMENT
Calulation for Variance,
Standard Deviaton and Beta
Year
Mar
ket
Ret
urn
Rate
%
Risk Free
Rate %
Excess
Marke
t
Return
(1-2)
Stoc
k
Retu
rn
Market
Deviation
from Average
Return
Square
d
Deviati
on
Stock
Deviati
on
from
AVE
Return
Square
d
Deviati
on
Cros
s
Prod
uct
(5 *
7)
Exc
ess
Ret
urn
Stoc
k
(4-
2)
199
8
10.4
3% 5.49% 4.94%
5.64
% 1.30%
0.017
% -2.73% 0.07%
-
0.03
54%
0.1
5%
199
9
13.8
1% 6.01% 7.80%
23.1
3% 4.68%
0.219
%
14.76
% 2.18%
0.69
06%
17.
12%
200
0
12.7
7% 6.31% 6.46%
19.5
5% 3.64%
0.132
%
11.18
% 1.25%
0.40
68%
13.
24%
200
1
7.65
% 5.62% 2.03%
10.0
8% -1.48%
0.022
% 1.71% 0.03%
-
0.02
53%
4.4
6%
200
2
-
10.6
4% 5.84%
-
16.48
%
-
19.3
5% -19.77%
3.909
%
-
27.72
% 7.68%
5.48
06%
-
25.
19%
200
3
14.6
1% 5.37% 9.24%
25.0
1% 5.48%
0.300
%
16.64
% 2.77%
0.91
16%
19.
64%
200
4
29.4
8% 5.59%
23.89
%
29.2
1% 20.35%
4.141
%
20.84
% 4.34%
4.24
07%
23.
62%
200
5
23.8
3% 5.34%
18.49
%
28.4
1% 14.70%
2.160
%
20.04
% 4.02%
2.94
57%
23.
07%
200
6
20.9
3% 5.59%
15.34
%
22.2
9% 11.80%
1.392
%
13.92
% 1.94%
1.64
24%
16.
70%
200
7
1.73
% 5.99% -4.26%
-
5.68
% -7.40%
0.548
%
-
14.05
% 1.97%
1.03
99%
-
11.
67%
200
8
-
33.5
8% 5.82%
-
39.40
%
-
68.0
9% -42.71%
18.243
%
-
76.46
% 58.46%
32.6
570
%
-
73.
91%
200
9
33.8
4% 5.04%
28.80
%
48.2
1% 24.71%
6.105
%
39.84
% 15.87%
9.84
40%
43.
17%
201
0
8.03
% 5.37% 2.66%
12.3
9% -1.10%
0.012
% 4.02% 0.16%
-
0.04
43%
7.0
2%
201
1
-
6.43
% 4.88%
-
11.31
%
-
6.54
% -15.56%
2.422
%
-
14.91
% 2.22%
2.32
01%
-
11.
42%
201
2
18.5
6% 3.38%
15.18
%
15.2
8% 9.43%
0.889
% 6.91% 0.48%
0.65
16%
11.
90%

14
CORPORATE FINANCIAL MANAGEMENT
201
3
10.3
8% 3.70% 6.68%
-
1.12
% 1.25%
0.016
% -9.49% 0.90%
-
0.11
85%
-
4.8
2%
201
4
11.6
7% 3.66% 8.01%
17.9
8% 2.54%
0.064
% 9.61% 0.92%
0.24
40%
14.
32%
201
5
-
6.43
% 2.71% -9.14%
-
15.4
4% -15.56%
2.422
%
-
23.81
% 5.67%
3.70
51%
-
18.
15%
201
6
16.2
9% 2.34%
13.95
%
26.2
3% 7.16%
0.512
%
17.86
% 3.19%
1.27
85%
23.
89%
201
7
5.70
% 2.72% 2.98%
0.20
% -3.43%
0.118
% -8.17% 0.67%
0.28
03%
-
2.5
2%
Tot
al
182.
63% 96.77%
85.86
%
167.
39% 0.00%
43.643
% 0.00%
114.80
%
68.1
153
%
70.
62%
Ave
rage
9.13
% 4.84% 4.29%
8.37
% 0.00%
2.182
% 0.00% 5.74%
3.40
58%
3.5
3%
Avg
(Ma
rket
Ret
urn
Rat
e -
Risk
Free
Rat
e)
4.29
%
Stock Market Beta
Discou
nt Rate
Variance
0.0358
50184 Variance
0.0229
69806
1.5607
52601
11.538
8%
Standard
Deviation
0.1292
87227
Standard
Deviation
0.0414
9334
Table 5

15
CORPORATE FINANCIAL MANAGEMENT
Day
s
Stock return
(%)
Market Return
(%)
Risk Free Rate
(%) Beta Expected
Return
Abnormal
Return
-5 0.3 0.3 0.0075 1.5607526
01 0.464020136 -0.164020136
-4 0.45 0.2 0.0075 1.5607526
01 0.307944876 0.142055124
-3 -0.18 0.01 0.0075 1.5607526
01 0.011401882 -0.191401882
-2 -0.6 -0.5 0.0075 1.5607526
01 -0.784581945 0.184581945
-1 1.2 0.2 0.0075 1.5607526
01 0.307944876 0.892055124
0 2.5 0.3 0.0075 1.5607526
01 0.464020136 2.035979864
1 1.3 -0.2 0.0075 1.5607526
01 -0.316356165 1.616356165
2 1.66 -0.1 0.0075 1.5607526
01 -0.160280905 1.820280905
3 1.5 0.1 0.0075 1.5607526
01 0.151869616 1.348130384
4 1.4 0.2 0.0075 1.5607526
01 0.307944876 1.092055124
5 1.26 0.35 0.0075 1.5607526
01 0.542057766 0.717942234