Stock Price Reactions to Capital Projects
Added on 2020-03-16
17 Pages2006 Words174 Views
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Running head: Capital Budgeting and Corporate Finance Student name:Capital Budgeting and Corporate Finance Institute Name:Affiliation: 1
Running head: Capital Budgeting and Corporate Finance Executive Summary Capital budgeting may be considered to be one of the most success critical elements in corporate finance. The management of every business firm should carefully consider the matter before finalising the corporate strategy. The report deals with one of such examples of a firm, Riverlea which is into an expansion mode and considering investment in a capital intensive project. The report is dividend in two parts. The first part shows the capital budgeting technique and related evaluation and analysis. The second part shows the stock price movement and related analysis. Finally, the report provides recommendation.2
Running head: Capital Budgeting and Corporate Finance Table of ContentsPart 1................................................................................................................................................4Introduction..................................................................................................................................4Findings........................................................................................................................................4Conclusions and Recommendations............................................................................................7Part 2................................................................................................................................................8Introduction..................................................................................................................................8Findings........................................................................................................................................8Conclusions and Recommendations..........................................................................................10References......................................................................................................................................11Appendices....................................................................................................................................123
Running head: Capital Budgeting and Corporate Finance Part 1Introduction The current part of the assignment pertains to computations regarding capital budget and for investment appraisal of Riverlea. In this part, the investment upon machinery as a part of the company's business expansion has been examined using capital budget techniques. Daunfeldt and Hartwig (2014) mentioned that capital budgeting techniques examined the expected earningsand revenues generated from a particular investment proposition using a host of parameters. These parameters range from initial capital investment, expected depreciation to cash flows generated and expected present value of the returns from the investments. In the current analysis,a detail financial analysis has been undertaken using discounting factors and expected cash flowsfor generation of net present value under three situations. Moreover, Capital Asset Pricing Modelhas been utilized in the current study through computations of beta, risk-free rates and thereby the degree of volatility showcased by River-lea's stock. Rossi (2014) mentioned that CAPM model takes into account systematic risk pertaining to stocks and thereby assists investors in undertaking buying or sell off decisions based upon their individual risk propensities. FindingsThere have been three situations provided for the analysis of investment decisions in the current study. This includes the expected revenues generated from the data provided in the assignment and changes in revenues from year 6 onwards. At the beginning of the study, the effort has been made to calculate the initial cost and corresponding depreciation. Installation and shipping cost has been added to the purchase cost to 4
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