XYZ Ltd. is a large retail company listed on a major stock exchange, and its reported net income for the year ended December 31, 2009, is $5 million. The earnings were announced to the public on December 31, 2009.

Financial analysts had predicted the company's net income for 2009 to be $7 million The financial analysts' prediction of $7 million net income was in effect up until the release of the 2009 earnings on December 31, 2009.

Assumptions No other news about XYZ Ltd. was released to the public on December 31, 2009.

No significant economy-wide events affecting share prices occurred on December 31, 2009.

Financial analysts' forecasts about XYZ Ltd.'s net income represented the market's expectations about XYZ Ltd.'s income

Required

a. Would you expect a change in price of XYZ Ltd.'s common stock on December 31, 2009? If so, why? Explain.

b. Consider the two situations below: persistent i. The deviation of forecasted earnings from actual earnings of $2 million (ie, $7 mil lion $5 million) is completely accounted for by the closing down of a number of its retail outlets II. The deviation of the forecasted earnings from actual earnings of $2 million is completely accounted for by a fire in XYZ Ltd s largest retail outlet, which had caused the outlet to be closed temporarily for six months.

In which of these two scenarios would you expect the price change of XYZ Ltd.'s common stock to be greater? Explain.