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FIN80005 Corporate Financial Management

tag 0 Download 7 Pages / 1,637 Words tag 16-07-2021

Questions:

Part 1

Riverlea is currently in negotiation with a large supermarket chain, Wowcoles, to supply its confectionery in a private label for Wowcoles. Under the terms, Riverlea is expected to supply confectionery to Wowcoles every year for the next ten years. If Riverlea proceeds with the supply of confectionery, the company needs to purchase machinery to cope with the increase in production.
 
New machinery is expected to cost $1,500,000, with an additional $200,000 installation and shipping costs. The machinery is expected to have a working life of 10 years. The company's accounting policy is to depreciate using the reducing balance approach.' For new machinery, the company decides to use depreciation rate of 20% per annum. It is expected that new machinery can be sold for $200,000 at the end of its useful life. 
 
You are to prepare spreadsheets, to present to the CEO, showing the various cash flows based on the different scenarios; assuming that the company decides to proceed with the supply of private label confectionery to Wowcoles. Use Excel to prepare a full analysis, evaluating whether or not the company should proceed with the supply of private label confectionery to Wowcoles, taking into consideration the various scenarios. 

Show all formulae, adjacent to the corresponding calculated amounts in the spread sheet. 

Part 2

Semi-strong form efficiency tests are concerned with whether security prices reflect all publicly available information. The event study methodology can be used to investigate the effects of many events such as a corporate announcement. By studying the stock price reaction before, during and after an announcement, an examination of whether the market is semi-strong form efficient can be conducted. After performing the full analysis in Part 1, assume that the company decides to proceed with the supply of private label confectionery to Wowcoles.
 
As such, the company announces details related to the expected increase in profits and cash flows that it would achieve from the supply of private label confectionery. The table below shows the closing stock price of Riverlea 5 days before and after the announcement. Day 0 is the day of the announcement and assume that there is no other price-sensitive announcement within the event window. 
 
Plot the stock price of Riverlea 5 days before and after the announcement. Discuss the stock price behaviour of Riverlea before, during and after the announcement and justify whether the stock price reaction is consistent with semi-strong form market efficiency. Your response should also include recommendations to exploit mispricing opportunities, if any, from the perspective of the company and expectations of what would happen to the share price subsequent to the analysed event window. 
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My Assignment Help. FIN80005 Corporate Financial Management [Internet]. My Assignment Help. 2021 [cited 03 February 2023]. Available from: https://myassignmenthelp.com/free-samples/fin80005-corporate-financial-management/share-price-movement.html.


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