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 $185 million at the end of this year and by $56 million at the end of next year.

a. If Roybus has 38 million shares outstanding and a weighted average cost of capital of 12.8%, what change in Roybus’s stock price would you expect upon this announcement?

(Assume 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.