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 $180 million at the end of this year and by $58 million at the end of next year. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (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. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) The change in price per share would be $ ☐. (Round to the nearest cent.) b. Would you expect to be able to short sell Roybus stock on hearing this announcement and make a profit? (Select the best choice below.) A. Because the stock price is likely to drop on this news, you should be able to profit by buying the stock and selling it two years later, after the firm is fully recovered. OB. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped. OC. If this event is public information, no trading profit should be possible because in an efficient market the market price will immediately drop to reflect this news. D. No trading profit is possible because your broker might not handle transactions on short notice.
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 $180 million at the end of this year and by $58 million at the end of next year. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (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. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) The change in price per share would be $ ☐. (Round to the nearest cent.) b. Would you expect to be able to short sell Roybus stock on hearing this announcement and make a profit? (Select the best choice below.) A. Because the stock price is likely to drop on this news, you should be able to profit by buying the stock and selling it two years later, after the firm is fully recovered. OB. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped. OC. If this event is public information, no trading profit should be possible because in an efficient market the market price will immediately drop to reflect this news. D. No trading profit is possible because your broker might not handle transactions on short notice.
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 7P
Related questions
Question
am. 119.
Transcribed Image Text: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 $180 million at the end of this year and by $58 million at the end of next year.
a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (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.
a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 13.2%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the
value of Roybus's debt is not affected by the event.)
The change in price per share would be $ ☐. (Round to the nearest cent.)
b. Would you expect to be able to short sell Roybus stock on hearing this announcement and make a profit? (Select the best choice below.)
A. Because the stock price is likely to drop on this news, you should be able to profit by buying the stock and selling it two years later, after the firm is fully recovered.
OB. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped.
OC. If this event is public information, no trading profit should be possible because in an efficient market the market price will immediately drop to reflect this news.
D. No trading profit is possible because your broker might not handle transactions on short notice.
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