Corporate Financial Management: Riverlea Investment Analysis Report

This report provides a comprehensive financial analysis of an investment opportunity presented to Riverlea, focusing on the production of confectionery. It utilizes various investment appraisal techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and discounted payback period, to evaluate the project's viability under different scenarios. Sensitivity analysis is conducted to assess the impact of potential adverse and positive circumstances on the project's profitability. The report also examines Riverlea's share price before and after a significant announcement, evaluating the market's efficiency and exploring trading strategies like short selling. The analysis concludes that the confectionery project is a viable investment, and that the share price demonstrates strong market efficiency. The use of short selling strategy is also recommended to generate higher returns. The report supports its findings with relevant literature and calculations.

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

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Executive Summary:
The report is mainly conducted to detect viability of the investment options that is presented
to Riverlea. Moreover, adequate evaluation of the opportunity in different circumstances is
been conducted to identify its viability. In addition, different types of investment appraisal
techniques are mainly used in identifying viability of the new opportunity that is presented to
the company. Additionally, the investment appraisal techniques such as NPV valuation
directly portray a positive value under all the three circumstances. Therefore, it is advisable to
Riverlea for commencing with the overall project, as adequate profitability will be provided
from the production of confectionery.
The following part 2 mainly deals with the evaluation of the share price of Riverlea before
and after the announcement of the extra income that will be generated in near future. In
addition, the overall valuation could also help in identifying whether shares of Riverlea have
strong market efficiency or not. The calculations and evaluation mainly indicate that the share
price of Roiverlea has adequate strong market efficiency to generate higher return from
investment. Moreover, the use of short selling strategy could eventually allow the investor to
generate higher return from investment, as the share price after news announcement inflated
exponentially.

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Table of Contents
Part 1:.........................................................................................................................................3
1. Introduction:...........................................................................................................................3
2. Findings:.................................................................................................................................3
2.1 Evaluating the Discounted Rate:..........................................................................................3
2.2 Calculating the expected cash flows of the project:.............................................................4
2.3 Sensitivity Analysis:.............................................................................................................6
2.3.1 Calculation of the cash flow when 40% probability is there for 40% lowers incremental
revenues:....................................................................................................................................6
2.3.2 Calculation of the cash flow when 10% probability is there for 20% increase in
incremental revenues:.................................................................................................................8
3. Concussion and Recommendations:....................................................................................10
Part 2:.......................................................................................................................................10
1. Introduction:.........................................................................................................................10
2. Findings:...............................................................................................................................11
2.1 Calculating and determining whether the stock is semi-strong efficiency:.......................11
2.2 Mentioning the trading strategy:........................................................................................13
3. Concussion and Recommendations:....................................................................................13
Reference and Bibliography:....................................................................................................14

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Part 1:
1. Introduction:
The main aim of the assignment is to evaluate the opportunity that is presented to
Riverlea by producing relevant confectionery in their premises. Moreover, adequate
evaluation of the opportunity in different circumstances is been conducted to identify its
viability. In addition, different types of investment appraisal techniques are mainly used in
identifying viability of the new opportunity that is presented to the company.
2. Findings:
2.1 Evaluating the Discounted Rate:
The above figure mainly represents the CAPM value, which is calculated after
detecting risk free rate, beta and market return. The overall risk free rate is mainly at 5.05%,
with a beta of 1.5 and market retune of 9.22%. The CAPM value is mainly used as the cost of
capital for Riverlea, which could in turn help in detecting vitality of the opportunity for
producing confectionery. In this context, Naseer and Bin Tariq (2015) stated that use of

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adequate cost of capital could eventually help in reducing the negative impact of inflation rate
on the return provided by the investment.

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2.2 Calculating the expected cash flows of the project:

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From the overall evaluation of the opportunity under normal situation, it portrays a positive cash flow from NPV valuation. This directly
indicates that the investment option is viable approach and could be used by the company for increasing its return from investment. Furthermore,
other investment appraisal techniques such as IRR, payback period and discounted payback period are used to evaluate financial stability of the
investment option. Hence, the IRR is mainly detected at 21.07%, while the payback period is detected at 3.9 years and discounted payback
period is identified as 5.4 years. The relevant result mainly represents that the production opportunity is viable approach for Riverlea, which
could increase returns in future from the investment (Ballestero, Perez-Gladish and Garcia-Bernabeu 2015).

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2.3 Sensitivity Analysis:
2.3.1 Calculation of the cash flow when 40% probability is there for 40% lowers incremental revenues:

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The above figure mainly represents the 40% probability for the decline in revenue by 40%, which could be obtained if adverse situations
are faced by the project. From the relevant evaluation a positive NPV could be identified, which indicates viability of the approach, NPV is
$693,199. Furthermore, the other investment appraisal techniques such as Internal Rate of Return (IRR), payback period and discounted payback
period could be identified from the evaluation, which are relatively positive and depict viability of the investment. Upton et al. (2015) stated that
using adequate sensitivity analysis mainly helps in detecting the relevant impact, negative and positive circumstance could have on profitability
of the investment.

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2.3.2 Calculation of the cash flow when 10% probability is there for 20% increase in incremental revenues:

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The probability for incremental revenues is mainly calculated in the above figure, where all the relevant calculations of the investment
appraisal techniques are adequately conducted. The overall NPV is mainly calculated at $939.042, while the IRR is mainly at 21.28% with a
payback period of 3.9 years and discounted payback period of 5.4 years. This relevant evaluation could directly portray higher revenue from
operations, which could be attained if positive circumstances occur. Hence the relevant evaluation of the sensitivity analysis directly indicates
that the overall project is a viable approach, where under adverse, normal and positive situations as it provides a positive NPV. Burns and
Walker (2015) mentioned that use of adequate sensitivity analysis could eventually allow the organisation to detect any kind of negative impact,
which could be conducted on its operations.

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3. Concussion and Recommendations:
From the overall evaluation of the above calculation such as sensitivity analysis and
investment appraisal techniques the overall viability of the investment option could be
identified. Moreover, the investment appraisal techniques such as NPV valuation directly
portray a positive value under all the three circumstances. Therefore, it is advisable to
Riverlea for commencing with the overall project, as adequate profitability will be provided
from the production of confectionery.
Part 2:
1. Introduction:
The following part 2 mainly deals with the evaluation of the share price of Riverlea
before and after the announcement of the extra income that will be generated in near future.
In addition, the overall valuation could also help in identifying whether shares of Riverlea
have strong market efficiency or not.

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2. Findings:
2.1 Calculating and determining whether the stock is semi-strong efficiency:

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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 overall calculations and graphical representations that are conducted in the above
figures can mainly help in identifying the impact of the announcement that was conducted by
Riverlea. From the relevant evaluation it could be identified that the share price in day 0
mainly increased by 101% as compared to the share price in day -1. This indicates that the
Overeaction

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shares of Riverlea are mainly considered under strong market efficiency. However, the actual
valuation of the share mainly needs to come around $3.10 as per the calculation conducted,
whereas the actual share price increase went to $4.35. In addition, there is retracement, which
could be seen from day 1 to day 5, which is relatively weird as the share price indicated that it
follows stock market efficiency. Hence the decline in share price is estimated, as investors
valuation went slightly over the actual value that could be obtained by the company.
Furthermore, relevant increment of 80% in share value was witnessed in day -1 as compared
to day -2. This directly indicates that information related to the news was leaked and depicted
an adequate impact of strong form of efficient market (Westerlund, Norkute and Narayan
2015).
2.2 Mentioning the trading strategy:
From the relevant evaluation, short selling process is mainly an adequate approach,
which could increase profitability of the investor. The share price is mainly inflated after the
announcement, which indicates that relevant correction the price will be conducted.
Therefore, the use of short selling could eventually help in improving returns of the investor
(Corazza and Malliaris 2015). The actual share value is mainly calculated to be at $3.10 from
$4.35, which will provide a return of 28.76% for the investor.
3. Concussion and Recommendations:
The relevant depiction of the calculation mainly helped in identifying whether the
shares of Riverlea has strong market efficiency. The calculations and evaluation mainly
indicate that the share price of Roiverlea has adequate strong market efficiency to generate
higher return from investment. Moreover, the use of short selling strategy could eventually
allow the investor to generate higher return from investment, as the share price after news
announcement inflated exponentially.

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Reference and Bibliography:
Ballestero, E., Pérez-Gladish, B. and Garcia-Bernabeu, A., 2015. Socially responsible
investment. A multi-criteria decision making approach (International series in operations
research & management science, Vol. 219). Cham: Springer.
Banke-Thomas, A.O., Madaj, B., Charles, A. and van den Broek, N., 2015. Social Return on
Investment (SROI) methodology to account for value for money of public health
interventions: a systematic review. BMC Public Health, 15(1), p.582.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Corazza, M. and Malliaris, A.T.G., 2015. Multi-fractality in foreign currency markets.
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.
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.
Westerlund, J., Norkute, M. and Narayan, P.K., 2015. A factor analytical approach to the
efficient futures market hypothesis. Journal of Futures Markets, 35(4), pp.357-370.