Price Volatility and Market Efficiency †Free Samples to Students

Question: Discuss about the Price Volatility and Market Efficiency. Answer: Introduction: From the overall evaluation of the spreadsheet, it could be understood that the NPV of the new project designed by Riverlea is relatively adequate. From the valuation it could be understood that the company's overall value will mainly increase by 86,942.60, as this is the NPV, which will we obtained by the company. However, the additional cash inflow that will be obtained by the company after incorporating the new project is 333,000 every year. This additional amount could eventually help the company obtain higher revenue and increase its value in future Management. This cash flow has been obtained by deducting all the cash outflows from the inflows provided by the new project (Baum and Crosby 2014).Calculation also, dates all the relevant reductions in revenue, which is obtained due to the commencement of the overall new project. The initial investment and cash inflows are relatively adequate as it might provide the company with relevant funds to support its future endeavours. Almar ri and Blackwell (2014) mentioned that derivation of NPV valuation mainly allows companies to adequate make decision regarding viability of a set investment opportunity. Particulars Value Beta 1.2 ASX200 15% 90-day bill 4.50% CAPM Rf + Beta*(Rm-Rf) CAPM 4.50% + 1.2 * (15%-4.5%) CAPM 17.10% Table 1: Depicting the expected returns of the company (Source: As created by the author) The overall NPV is mainly calculated by deriving the expected returns of the company, which is mainly at 17.10%. This expected return is mainly helpful in deriving the overall NPV of the project, as all the relevant future cash flows will be discounted. This discounting could eventually help in identifying the overall viability of the project. Eliasson and Brjesson (2014) stated that use of NPV allows companies to accommodate time value of money, which is essential to accommodate inflation. Optimistic Normal Pessimistic Optimistic - Pessimistic Probability 20% 100% 30% NPV 233,073.03 86,942.90 (59,187.23) Sensitivity 46,614.61 86,942.90 (17,756.17) 64,370.78 Table 2: Depicting the NPV of the project and sensitivity analysis (Source: As created by the author) The table 2 also states the overall sensitivity of the project, which might hamper the relative income that is being portrayed from the new investment. According to the overall probability of 30%, 20% of income might be lower from the sixth year. This decline in revenue could eventually reduce the overall NPV value and portray a loss of 17,756.17. However, with the probability of 20%, relative income might increase by 20% making the overall NPV to 233,073.03, which could eventually help in improving the return from investment. The company's over optimistic views could be achieved according to the circumstances that come during the investment. The rate of decline in revenue could also lead to decline and cost, which in turn might help in supporting the future NPV. Dyson and Berry (2014) stated that use of sensitivity analysis allows companies to evaluate two different scenarios, which could happen during the commencement of the business. Gotze, Northcott and Schuster (2015) argued tha t without relevant information and research investments should not be considered, as it might increase risk and reduce the overall capital investment. From the overall evaluation of the new project, it is advisable to CEO for commencing Management the new project, as it might help in increasing revenue of the company. All the relevant information regarding cash inflows is effectively represented within the confinements of the spreadsheet. The overall project is providing a positive view of the investments, which could eventually help in increasing the overall value of the firm (Lakew and Rao 2015). This could eventually increase the overall return and firm value of the company in your future. Lastly, it could be understood that supply of private label confectionery to Wowcoles could eventually help the company in attain higher income in future. This could eventually help in improving share price of the company after the overall announcement of the new revenue stream. Thus, it is advisable to the CEO to adopt the investment proposal and increase return from investment (Guerra, Magni and Stefanini 2014). Discussing the price behaviour of Riverlea before, during and after the announcement: The above figure mainly depicts the overall price change, which is witnessed before and after the announcement. Relative search from the previous day of announcement could be witnessed this search mainly represents the total return of 79.63% on the day of announcement. However, relative increment before the announcement date could be seen, which depicts expectation of investors regarding some news. In addition, the price movement after the announcement date mainly declined and provided the negative return (Seng, Wu and Yang 2016). Furthermore, down the line from two to three days the price movement has not rusted adequately however it has rapidly declined from the announcement date.This decline in value could be witnessed after the announcement date until day 5. This decline in Share price mainly depicts the relevant impact of Semi strong form of market efficiency, which increases the chance of mispricing opportunities. According to the new investment opportunity, the company is over revenue growth will only group by 86,942.90, whereas any change in revenue could decrease viability of the investment. This information could not have adequately increased the share price that exponentially, which was witnessed in announcement date. Adam, Marcet and Nicolini (2016) argued that due to market sentiment huge price fluctuations could be seen and inflammatory value of the stocks could be witnessed. Relative trading strategies could be developed for contemplating pricing opportunity, which is different from the announcement. After evaluating the new project, trading strategy could be adopted where the high-obtained share price obtained in the announcement date might be shorted for next 5 to 10 days in the anticipation of declining share price. The market is currently at semi strong variation where adequate news is not travelling to the investor and stocks is not adequately being discounted according to the news (Lee, Stevenson and Lee 2014). This semi strong variation of market efficiency is mainly opening shorting opportunity, which could be utilised by the investor to have diminutive gains. Reference: Adam, K., Marcet, A. and Nicolini, J.P., 2016. Stock market volatility and learning.The Journal of Finance,71(1), pp.33-82. Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects.Procedia-Social and Behavioral Sciences,119, pp.847-856. Baum, A.E. and Crosby, N., 2014.Property investment appraisal. John Wiley Sons. Dyson, R.G. and Berry, R.H., 2014. Capital investment appraisal.Developments in Operational Research: Frontiers of Operational Research and Applied Systems Analysis, p.59. Eliasson, J. and Brjesson, M., 2014. On timetable assumptions in railway investment appraisal.Transport Policy,36, pp.118-126. Gtze, U., Northcott, D. and Schuster, P., 2015. Selected Further Applications of Investment Appraisal Methods. InInvestment Appraisal(pp. 105-159). Springer Berlin Heidelberg. Guerra, M.L., Magni, C.A. and Stefanini, L., 2014. Interval and fuzzy average internal rate of return for investment appraisal.Fuzzy Sets and Systems,257, pp.217-241. Lakew, D.M. and Rao, D.P., 2015. Financial Appraisal of Long Term Investment Projects: Evidence from Ethiopia.Asian Journal of Research in Business Economics and Management,5(2), pp.1-16. Lee, C.L., Stevenson, S. and Lee, M.L., 2014. Futures trading, spot price volatility and market efficiency: evidence from European real estate securities futures.The Journal of Real Estate Finance and Economics,48(2), pp.299-322. Seng, J.L., Wu, Y.H. and Yang, H.F., 2016. Conference Calls News Analysis and Stock Price Volatility. 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