XYZ Ltd. is a large retail company listed on a major stock exchange, and its reported net income for the year ended December 31, 2019, is $5 million. The earnings were announced to the public on March 31, 2020. Just before the release of the 2019 earnings on March 31, 2020, financial analysts had predicted the company's net income for 2019 to be $7 million. 

Assumptions

• No other news about XYZ Ltd. was released to the public on March 31, 2020.

• No significant economy-wide events affecting share prices occurred on March 31, 2020.

Required

a. Would you expect a change in price of XYZ Ltd.'s common stock on March 31, 2020? If so, why?

b. Consider the two situations below:

i The $2 million deviation of forecasted earnings from actual earnings is completely accounted for by XYl Ltd.'s having closed down a number of its retail outlets.

ii The $2 million deviation of the forecasted earnings from actual earnings 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 XYl Ltd.'s common stock to be greater? Explain.

c . Suppose instead that significant economy-wide events on March 31, 2020, resulted in a major increase in the stock market index. Would this affect your answer in part a ? Explain.