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 Roybus's free cash flow by $180 million at the end of this year and by $57 million at the end of next year. a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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 profie? Explain. CID a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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) OA. 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 OB. No trading profit is possible because your broker might not handle transactions on short notice OC. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped. OD. 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.
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 Roybus's free cash flow by $180 million at the end of this year and by $57 million at the end of next year. a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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 profie? Explain. CID a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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) OA. 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 OB. No trading profit is possible because your broker might not handle transactions on short notice OC. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped. OD. 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Topic Video
Question
Ee 419.
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 $57 million at the end of next year.
a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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.
Cm
a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13.5%, 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)
OA. 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
OB. No trading profit is possible because your broker might not handle transactions on short notice.
OC. You should be able to profit by short selling the stock immediately and buying it once the market price has dropped.
OD. 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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education