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 $$180$ million at the end of this year and by $$58$ million at the end next

a$.$ If Roybus has $30$ million shares outstanding and a weighted average cost of capital of $13\mathrm{.}2\%,$ 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.

a$.$ If Roybus has $30$ million shares outstanding and a weighted average cost of capital of $13\mathrm{.}2\%,$ 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.$)$

The change in price per share would be $$.($Round to the nearest cent.$)$

b$.$ Would you expect to be able to short sell Roybus stock on hearing this announcement and make a profit? $($Select the best choice below.$)$

A$.$ Because the stock price is likely to drop on this news, you should be able to profit by buying the stock and selling it two years later, after the firm is fully recovered.

B$.$ You should be able to profit by short selling the stock immediately and buying it once the market price has dropped.

C$.$ If this event is public information, no trading profit should be possible because in an efficient market the market price will immediately drop to reflect this news.

D$.$ No trading profit is possible because your broker might not handle transactions on short notice.