Riverlea Stock Valuation and Trading Strategy

This assignment analyzes the share price of Riverlea after an announcement of higher future income. It evaluates the company's adherence to the efficient market hypothesis by comparing estimated and actual share prices. The analysis suggests the shares are overvalued, recommending a short-selling strategy for investors seeking to profit from a potential price correction.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the University:
Authors Note:

CORPORATE FINANCIAL MANAGEMENT
1
Executive Summary:
The report aims in providing viable condition for using the overall investment option by
Riverlea. In addition, the financial viability of the project is mainly identified with the help of
different situation, where the overall highest and lowest cash flow could be identified. The
use of investment appraisal techniques such as payback period, NPV, discounted payback
period and IRR is mainly used in detecting viability of the project. From the overall valuation
of the sensitivity analysis and investment appraisal techniques adequate viability of the
investment project could be identified. The sensitivity analysis mainly portrays an overall
range of return that will be provided by the investment under different circumstance.
Moreover, the investment appraisal techniques have provide a positive value, which make the
project viable for the company. Hence it is recommended for Riverlea to start the production
of confectionaries, as it will provide higher returns from investment.
The report is mainly presented to detect whether the overall share of Riverlea is under strong
market efficiency. Moreover, adequate trading scheme is also disused, which could be used
by the investor to increase their overall profit. Therefore, adequate calculations and graphs
are used for portraying and identifying viability of the share price movement after
announcement. The overall valuation of the share price mainly help in understanding that
shares of Riverlea are adequately under efficient market form, where any announcement
could increase or decrease its share value. Therefore, the current situation depicts an inflated
share price, where investor could be short selling the stock to increase their return until the
share price corrects and depicts an adequate valuation of $3.11 from $4.35.

CORPORATE FINANCIAL MANAGEMENT
2
Table of Contents
Part 1:.........................................................................................................................................3
1. Introduction:...........................................................................................................................3
2. Findings:.................................................................................................................................3
2.1 Discounted rate calculation used as cost of capital:.............................................................3
2.2 Portraying the normal condition cash flow from the project:..............................................4
2.3 Sensitivity Analysis:.............................................................................................................6
2.3.1 Portraying the cash for adverse situation:.........................................................................6
2.3.2 Portraying the cash flow under favourable circumstances:...............................................8
3. Concussion and Recommendations:....................................................................................10
Part 2:.......................................................................................................................................10
1. Introduction:.........................................................................................................................10
2. Findings:...............................................................................................................................11
2.1 Finding out whether the stock has semi-strong market efficiency:....................................11
2.2 Mentioning the trading strategy that could be used:..........................................................13
3. Concussion and Recommendations:....................................................................................13
Reference:................................................................................................................................14

CORPORATE FINANCIAL MANAGEMENT
3
Part 1:
1. Introduction:
The report mainly indicates the use of adequate investment appraisal techniques in
evaluating the significance of the new project for Riverlea, which might help in generating
higher revenue. In addition, the financial viability of the project is mainly identified with the
help of different situation, where the overall highest and lowest cash flow could be identified.
The use of investment appraisal techniques such as payback period, NPV, discounted
payback period and IRR is mainly used in detecting viability of the project.
2. Findings:
2.1 Discounted rate calculation used as cost of capital:
The overall CAPM evaluation mainly identifies the cost of capital, which
might help in evaluating different projects. In addition, the CAPM valuation is mainly
derived by using market return, risk free rate return and stock beta. This could eventually
help in deriving the overall profitability that might be generated from the operations. Upton et
al. (2015) stated that use of cost of capital is mainly conducted to compensate the rising
inflation rate and derive adequate valuation of the future cash inflows.

CORPORATE FINANCIAL MANAGEMENT
4
2.2 Portraying the normal condition cash flow from the project:

CORPORATE FINANCIAL MANAGEMENT
5
With the help of above calculations overall viability of the project could be identified, which in turn might depict the overall profitability
that might be generated from operations. The NPV valuation is mainly identified at $948,392, while the payback period is detected to be at 4.6
years, and discounted payback period is 6.5 years. The overall positive valuation of the investment appraisal techniques mainly indicates the
viability of the project, which needs to be conducted by Riverlea. Burns and Walker (2015) mentioned that use of adequate financial process and
valuation companies are able to detect the overall value, which will be provided by different investment options.

CORPORATE FINANCIAL MANAGEMENT
6
2.3 Sensitivity Analysis:
2.3.1 Portraying the cash for adverse situation:

CORPORATE FINANCIAL MANAGEMENT
7
Under worst case scenario the project is able to evaluate, as the overall revenue declines by 40, as it has a 40% probability of the reduced
revenue generation capacity. The valuation of the investment appraisal techniques directly indicates that the investment options portrayed to
Riverlea is viable, as it might help in generating higher revenue. The IRR is mainly detected to be around 19.75%, while the NPV is identified to
be $729,865. This could directly result in higher revenue generation capability, which in turn might improve sustainable growth of the company.
The payback period is within 4.6 years, while the discounted payback period is within 6.5 years, which is relatively before the completion of the
while project. This directly states its significance from producing the capital before completion of the project. Eliasson et al. (2015) argued that
payback period is mainly able to state whether the investment would return the investment capital within the life of the project, it is not able to
detect adequate value of the investment option.

CORPORATE FINANCIAL MANAGEMENT
8
2.3.2 Portraying the cash flow under favourable circumstances:

CORPORATE FINANCIAL MANAGEMENT
9
The above figure directly portrays the overall valuation of the new project under favourable conditions, where the overall NPV mainly
rose to $975,708 with the IRR of 21.69%, Payback period of 4.6 years and discounted payback period of 6.4 years. The favourable conduction
directly increases the overall revenue that is generating from the particular propjet. However, there is only 10% probability of any kind of
increment in the revenue by 20%. This does not increase the overall benefit from normal conditions. However, the overall valuation of worst,
favourable and normal condition directly helps in portraying a range within which the project will provide the returns. Burns and Walker (2015)
mentioned that use of adequate sensitivity analysis mainly provide companies with the range in which overall project return could change.

CORPORATE FINANCIAL MANAGEMENT
10
3. Concussion and Recommendations:
From the overall valuation of the sensitivity analysis and investment appraisal
techniques adequate viability of the investment project could be identified. The sensitivity
analysis mainly portrays an overall range of return that will be provided by the investment
under different circumstance. Moreover, the investment appraisal techniques have provide a
positive value, which make the project viable for the company. Hence it is recommended for
Riverlea to start the production of confectionaries, as it will provide higher returns from
investment.
Part 2:
1. Introduction:
The report is mainly presented to detect whether the overall share of Riverlea is under
strong market efficiency. Moreover, adequate trading scheme is also disused, which could be
used by the investor to increase their overall profit. Therefore, adequate calculations and
graphs are used for portraying and identifying viability of the share price movement after
announcement.

CORPORATE FINANCIAL MANAGEMENT
11
2. Findings:
2.1 Finding out whether the stock has semi-strong market efficiency:

CORPORATE FINANCIAL MANAGEMENT
12
From the relevant calculations and graphs depicted in the above graph adequate
impact of the share price after the announcement of higher income in future can be evaluated.
However, after the announcement the share price inflated to $4.35, while according to the
estimation it needs to be increased to $3.11. The overfill share price of the company
increased from day -1 to day 0 by 101% indicating that the company’s shares are well under
adequate efficient market hypothesis (Naseer and Bin Tariq 2015). This indicates that all the
relevant information is directly provided to the investors. Moreover, the valuation of the
Overeaction

CORPORATE FINANCIAL MANAGEMENT
13
share price from day-2 to day -1 also depicts an increment of 80%, which indicate that news
of the announcement was leaded, which increased the overall share value. This also indicates
that overall shares of the company have efficient market form, which is why new leak
increased share price of the company.
The share price of the company selling the valuation will decline in future, whereas
from day 0 to day 5 the share price has not significantly corrected, which directly violates the
efficient market hypothesis. Therefore, the factors such as emotion could be playing a vitality
role in the valuation of the company (Rossi 2015).
2.2 Mentioning the trading strategy that could be used:
The investor could use the use of short selling trading strategy, as share price of
Riverlea after the announcement has adequately inflated. The share price at day 0 was mainly
at $4.35, which could be shorted, as per the valuation share price will drop to $3.11,
providing an overall return of 27.91%. The use of the trading strategy could eventually allow
the investor to make adequate return and generate higher profitability from the trade (Ţiţan
2015).
3. Concussion and Recommendations:
The overall valuation of the share price mainly help in understanding that shares of
Riverlea are adequately under efficient market form, where any announcement could increase
or decrease its share value. Therefore, the current situation depicts an inflated share price,
where investor could be short selling the stock to increase their return until the share price
corrects and depicts an adequate valuation of $3.11 from $4.35.

CORPORATE FINANCIAL MANAGEMENT
14
Reference:
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Eliasson, J., Börjesson, M., Odeck, J. and Welde, M., 2015. Does Benefit–Cost Efficiency
Influence Transport Investment Decisions?. Journal of Transport Economics and Policy
(JTEP), 49(3), pp.377-396.
Naseer, M. and Bin Tariq, Y., 2015. The efficient market hypothesis: A critical review of the
literature. IUP Journal of Financial Risk Management, 12(4), p.48.
Rossi, M., 2015. The efficient market hypothesis and calendar anomalies: a literature
review. International Journal of Managerial and Financial Accounting, 7(3-4), pp.285-296.
Ţiţan, A.G., 2015. The Efficient Market Hypothesis: review of specialized literature and
empirical research. Procedia Economics and Finance, 32, pp.442-449.
Upton, J., Murphy, M., De Boer, I.J.M., Koerkamp, P.G., Berentsen, P.B.M. and Shalloo, L.,
2015. Investment appraisal of technology innovations on dairy farm electricity
consumption. Journal of dairy science, 98(2), pp.898-909.