Daisy Ltd. is a computer retail company listed on the NYSE. For year ended 31 December 2019, its reported net income is $8M. These earnings were made public on 31 March 2020. Financial analysts predicted the company’s net income to be $7M with this prediction being up to when the 2019 earnings were made public. No other news was released to the public on 31 March 2020, and there were no significant economy-wide events affecting share prices up to that date.

Required 

(a) Would you expect a change in the share price of Daisy Ltd. on 31 March 2020. If so, why? 

(b) Consider the two situations below: 

(i) The deviation of forecasted earnings from actual earnings of $1M is completely accounted for due to the signing of a significant contract signed by the company that will continue into the future supplying computers to government schools in their district.

(ii) The deviation of forecasted earnings from actual earnings of $1M is completely accounted for due to a one-off gain from the sale of a written-down asset. In which of these two scenarios would you expect the price change of Daisy Ltd.’s share price to be greater? Explain why.

(c) For each the following, (i) Beta, and (ii) Capital structure (leverage): Detail whether you would expect these to be associated with a higher or lower ERC, and give the reason why.