Corporate Finance Assignment Sample

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Introduction of Corporate Finance Assignment

The efficient market hypothesis mainly refers to the particular state at which the particular news has been spread into the market and it can immediately make changes in the stock price and return value with the use of Fundamental and technical analysis as well. The main aim of this report is to identify the major use of the efficient market hypothesis in context to analyze the proper return value that has been paid to the shareholders. The value and estimated changes in the market share value of the two selected companies Sainsbury and Ocado plc has been used and evaluated for the proper share return value. Another major objective of this report is to provide a clear view in context to compare the company's performance in terms of EMH with the FTSE 100.

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Efficient market Hypothesis (EMH)

The efficient market Hypothesis has been referring to the effective reflection of the relationship between the two aspects as the availability of the information in the market and the current share prices of the market trading for the public company. In another word, it can be implicated that the effectiveness of the major information related to the market has been effective depending on the required market price of the publicly listed company. The information has been released into the[public market to have the required effect on the share price as well. There are three major forms of EMH that have been analyzed in the market and they have been briefly discussed.

Weak form of efficiency

The weak form of the EMH mainly suggests that today or the current price of the stock has mainly reflected the required data of the past and it does not include any type of technical analysis for taking the required decision for the trading. As per the view of Noreen et al. (2022), if the trader can use the fundamental term for taking the decision then all the “undervalued and overvalued” factors can be included in the valuation. The inclusion of all types of market prices can make an effect on manipulating the financial data and showing a higher range as compared to real-time average profit value.

Semi-Strong Form of efficiency

The semi-form of the efficiency value mainly implies the aspect that the available data in the market with the use of fundamental and technical analysis can not help in gaining the actual return value in the market. Based on the reference of Blackledge and Lamphiere (2022), the information that cannot be readable by the customers can only help in analyzing the actual position. It makes an effect on taking the adequate decision for the investors to boost the return with the effective decision.

A strong form of efficiency

The strong form of the EMH has mainly stated that both the information which has been available or not available in the market can be used by the information for their accounting. As per the view of Vasileiou (2021), there is no piece of adequate information that can help investors to gain the required profit. An investor cannot be able to gain a “return on investment” more than the average value of returns.

Significance of EMH

The EMH has been one of the effective aspects for the political implication as it is “adhering to liberal economic thought”. The major significance of the EMH has been accumulated at the time of reflecting the fair market price of the stock. Based on the valuation of Metescu (2022), the fair stock price has cleared that there is no need for governmental intervention in terms of accumulating effective information about the company stock pierce in the market. The Estimated value of the stock in the market has always been in the “Fair” range.

Event study and testing of the market efficiency

Sainsbury Plc

The valuation of the changes in the share value of Sainsbury has been effectively analyzed in terms of declining rates. As per the view of Smith (2021), the required value of the shares to the “British grocery chain” Sainsbury has increased in the US market. The valuation of the major changes in the market fluctuation has been effectively analyzed and has a proper reflection on understanding the reason behind the fluctuation of the demand in the market as well. As per the report of Smith (2021), it has been analyzed that the value of the shares has been raised by 3.7%. On the other hand, the required changes in the share's value have an effective implication on analyzing the proper range in the changes in the value of the shares as well. Changes in the value of the shares have also accumulated over the past five years. Based on the valuation of D'Arcy (2022), the investors of Sainsbury have not gained an effective return in the year 2022. On the contrary, it has been analyzed that the company has raised the minimum return in the past five years for the company owner. The value of the b business has been analyzed with the use of the current shares value, for example, if the current share price is 209.88p then the required value of the business is £4.9bn (D'Arcy, 2022).

Ocado plc

The changes in the shares value of Ocado plc have been effectively analyzed based on the proper view of the news article. As per the reference of Angelo (2022), Ocado plc has maintained its sales target and has an effective reflection on achieving the target price of the shares as p504.00. The closing value of Ocado plc on the 3rd November 2022 has been evaluated as $7.41 which shows the effective work in an appropriate way. On the other hand, the market cap of the company is analyzed as $6.14B and the required P/E ratio on the same is -11.45 (Angelo, 2022). The valuation of the effective changes in the stock value of Ocado plc has been analyzed based on the proper changes in the value of the shares as well. As per the view of Smith (2022), the shares value of Ocado plc has been down by 10%. The “British grocery technology company” Ocado plc has plunged more than the value 10% after the changes in the sales value which were lower in the entire year. [Refer to appendix 3]

Comparison of the J. Sainsbury Plc with the FTSE 100

The proper valuation of the required shares of Sainsbury has been analyzed and has the proper reflection on comparing the return value with the FTSE 100. The value of the overall changes in the work has properly analyzed the change in comparing the rise and fall value of the return value in an appropriate way. The comparison of the value of the shares has been effectively done with the use of the adjusted closing value of Sainsbury and FTSE 100 as well (Machmuddah et al. 2022). The major changes in the value have been used and represent the return value in the percentage range. It has mainly analyzed the required shares' return value and has proper implications for analyzing the effective changes in the return for the past five years. The return value of the shares has been evaluated for the 60 months and has implications on analyzing the major trend of the share's return value with the use of each adjusted closing value as well.

Figure 1: Comparison graph of FTSE 100 and J. Sainsbury plc.

(Source: uk.finance.yahoo.com, 2022)

The required value of the changes in the return value of the past five years on the monthly basis has been represented in the term of the graph. The graphical representation can help in easily understanding the changes in the share return value of the company in the past 60 months as well. With the above figure, it has been clearly accumulated that the highest return value of Sainsbury plc has been analyzed as 29% in April 2018 (sainsburys.co.uk, 2022). The valuation of the major changes in the value shows in an effective manner as compared to the FTSE 100. The line graph clearly makes an implication on understanding the shares value of Sainsbury plc is more effective than the overall value of the FTSE 100 and has the proper implication and analysis of the effective range. On the other hand, the maximum value of the shares return for the FTSE 100 has been analyzed as 12% in December 2020.

It has also evaluated the required standard deviation and average returns of the both company that can help in accumulate the required position of the both company in an appropriate way. The proper standard deviation value of the Sainsbury and ocado plc has been evaluated as 0.0886 and 0.17 respectively. The value of the Sainsbury shows the more volatility position as compare to the Ocado plc. On the other hand, the avlue of the average rate has been estimated for the both company are 1% and 2%.

Conclusion

It has been concluded that the proper valuation of each aspect and type of the EMH has been effectively analyzed and has an implication on understanding each factor of the EMH. The valuation of the three types of the EMH has been discussed and also discussed the major significance of the EMH in an appropriate manner. The major importance of the EMH has been estimated in terms of the accurate value that has been reflected by the company to make an effective decision for the investment. M moreover, it has used the two company’s share return values to estimate the major changes in the return value based on the effective valuation of the adjusted closing value.

Reference

  • Austin Angelo. (2022), Kepler Capital Keeps Their Sell Rating on Ocado Group (OCDGF). Avaialble at: https://www.tipranks.com/news/blurbs/kepler-capital-keeps-their-sell-rating-on-ocado-group-ocdgf [Accessed on: 11th November 2022]
  • Blackledge, J. and Lamphiere, M., 2021. A Review of the Fractal Market Hypothesis for Trading and Market Price Prediction. Mathematics, 10(1), p.117.
  • Cliff D'Arcy. (2022), Sainsbury’s shares look too cheap to me. Here’s why!. Available at: https://www.fool.co.uk/2022/11/05/sainsburys-shares-look-too-cheap-to-me-heres-why/ [Accessed on: 11th November 2022]
  • Elliot Smith. (2021), Sainsbury’s changes in the share. Available at: https://www.cnbc.com/2021/10/04/sainsburys-shares-rise-on-speculation-after-private-equity-swoops-for-rival-morrisons.html [Accessed on: 11th November 2022]
  • Elliot Smith. (2022), Stocks on the move: Future up 8%, Ocado down 10%. Available at: https://www.cnbc.com/2022/09/13/european-markets-open-to-close-us-inflation-data-earnings-and-news.html [Accessed on: 11th November 2022]
  • finance.yahoo.com. (2022), Graph for comparison of saisbury with the FTSE 100. Avaialble at: https://uk.finance.yahoo.com/quote/SBRY.L/chart?p=SBRY. [Accessed on: 11th November 2022]
  • Machmuddah, Z., Utomo, S.D., Suhartono, E., Ali, S. and Ali Ghulam, W., 2020. Stock market reaction to COVID-19: Evidence in customer goods sector with the implication for open innovation. Journal of Open Innovation: Technology, Market, and Complexity, 6(4), p.99.
  • Metescu, A.M., 2022. Modern Paradigm Regarding Capital Markets: Fractal Market Hypothesis. Determination of the Hurst Exponent on the Romanian Capital Market. EIRP Proceedings, 17(1).
  • Noreen, U., Shafique, A., Ayub, U. and Saeed, S.K., 2022. Does the Adaptive Market Hypothesis Reconcile the Behavioral Finance and the Efficient Market Hypothesis?. Risks, 10(9), p.168.
  • ocadogroup.com (2022), About company. Available at: https://www.ocadogroup.com/ [Accessed on: 11th November 2022]
  • sainsburys.co.uk. (2022), About company. Available at: https://www.sainsburys.co.uk/ [Accessed on: 11th November 2022]
  • Vasileiou, E., 2021. Turn-of-the-month effect, FX influence, and efficient market hypothesis: new perspectives from the Johannesburg stock exchange. Macroeconomics and Finance in Emerging Market Economies, pp.1-17.

References

  • Dias, R., Heliodoro, P. and Alexandre, P., 2020. Efficiency of Asean-5 Markets: An Detrended Fluctuation Analysis. Mednarodno Inovativno Poslovanje= Journal of Innovative Business and Management, 12(2), pp.13-19.
  • Dias, R., Heliodoro, P. and Alexandre, P., 2020. Efficiency of Asean-5 Markets: An Detrended Fluctuation Analysis. Mednarodno Inovativno Poslovanje= Journal of Innovative Business and Management, 12(2), pp.13-19.
  • Gabaix, X. and Koijen, R.S., 2021. In search of the origins of financial fluctuations: The inelastic markets hypothesis (No. w28967). National Bureau of Economic Research.
  • Kyriazis, N.A., 2019. A survey on efficiency and profitable trading opportunities in cryptocurrency markets. Journal of Risk and Financial Management, 12(2), p.67.
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