Question 3

Pantus, Inc., a manufacturer of cleaning products, just reported that its main production facility in Hong Kong was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Pantus free cash flow by $50 million for the next three years.

a) As an average investor in the market, would you expect to be able to sell Pantus stock on hearing this announcement and make a profit? Explain in detail.

b) Should the cost of insurance be included in undertaking the free cash flow analysis of the accident? Why?