Question

​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 35 million shares outstanding and a weighted average cost of capital of 13.6%​, 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 35 million shares outstanding and a weighted average cost of capital of 13.6%​, 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. 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.

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

C.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.

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

Answer 1