Interpreting stock price changes (LO 6-6) On July 10, 2012, Advanced Micro Devic

Question

Interpreting stock price changes (LO 6-6)

On July 10, 2012, Advanced Micro Devices (AMD) announced that it expected its revenues for the second quarter to be about $1.4 billion. At the time of the announcement, financial analysts expected AMD’s second quarter revenue to be about $1.6 billion.

Required:

Would AMD’s announcement cause a change in the company’s stock price on the date of the announcement? Explain why or why not. (Assume the announcement was made while the market was open.)

Consider the following two scenarios:

The $200 million difference between AMD’s management forecast and analysts’ forecast is completely attributable to a previously reported monthlong labor strike at one of AMD’s manufacturing facilities.

The $200 million difference between AMD’s management forecast and analysts’ forecast is attributable to AMD’s previously undisclosed decision to cut prices to meet those of a competitor.

Do you expect the magnitude of the stock price change to be greater under scenario (a) or scenario (b)?

Explanation / Answer

1. Yes, since the compnay would be perofrming below expectations there would be a change in the market share prices and they will fall down

2. I think price change in the second scenario would be greater because in this way there would be permanent reduction in the prices. Effect of month long strike would be sustained over the time but the effect of lower prices and lower profit margin would need substantial increase in demand of the AMDs products which may or may not happen. Reduction in price is not a set formula for sales growth.

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