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:

CORPORATE FINANCIAL MANAGEMENT
1
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.

CORPORATE FINANCIAL MANAGEMENT
2
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

CORPORATE FINANCIAL MANAGEMENT
3
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

CORPORATE FINANCIAL MANAGEMENT
4
adequate cost of capital could eventually help in reducing the negative impact of inflation rate
on the return provided by the investment.

CORPORATE FINANCIAL MANAGEMENT
5
2.2 Calculating the expected cash flows of the project:

CORPORATE FINANCIAL MANAGEMENT
6
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).

CORPORATE FINANCIAL MANAGEMENT
7
2.3 Sensitivity Analysis:
2.3.1 Calculation of the cash flow when 40% probability is there for 40% lowers incremental revenues:

CORPORATE FINANCIAL MANAGEMENT
8
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.

CORPORATE FINANCIAL MANAGEMENT
9
2.3.2 Calculation of the cash flow when 10% probability is there for 20% increase in incremental revenues:

CORPORATE FINANCIAL MANAGEMENT
10
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.

CORPORATE FINANCIAL MANAGEMENT
11
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.