1.

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$59 million at the end of next year.

a. If Roybus has 34 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 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

2.

Suppose Acap Corporation will pay a dividend of $2.89 per share at the end of this year and $3.01 per share next year. You expectAcap's stock price to be $51.19 in two years. Assume that Acap's equity cost of capital is 11.8%.

a. What price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for two years?

b. Suppose, instead, you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year?

c. Given your answer in part b, what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this price compare to your answer in part a?