1 . Roybus, Inc., a manufacturer of flashmemory, just reported that its main production facility in Taiwan...
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Question:
1 . Roybus, Inc., a manufacturer of flashmemory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fullyinsured, the loss of production will decreaseRoybus's free cash flow by $182 million at the end of this year and by $65 million at the end of next year.
a. If Roybus has 33 million shares outstanding and a weighted average cost of capital of 12.3%, what change inRoybus's stock price would you expect upon thisannouncement? (Assume that the value ofRoybus's debt is not affected by theevent.)
b. Would you expect to be able to sell Roybus stock on hearing this announcement and make aprofit? Explain.
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