Question

Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $184 million at the end of this year and by $55 million at the end of next year. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.6%, what change in Roybus's stock price would you expect upon this ? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain

Please answer A and B, thank you!

Answer 1

a.

change in stock price

=(184/(1+13.6%)^1+55/(1+13.6%)^2)/30

=6.82

So stock price will decline by 6.82 per share.

b.

as this is likely to result in sudden decline in share price on expectations of public release of this event, so no profit from trading is expected.

the above is answer..