consider a firm, Hit Hard, that makes \"flak jackets\" for Quarterbacks. It just
ID: 2627930 • Letter: C
Question
consider a firm, Hit Hard, that makes "flak jackets" for Quarterbacks. It just had an earning surprise when news of a competitor that used a new technology to reduce production costs. Hit Hard and the market suddenly realized that cash flow to Hit Hard will decrease by $3.3 million next year until the firm incorporates the new technology into its production process. If the firm has no debt and an equity cost of capital of 8%, what would be the anticipated decrease in the firm's stock price that the markets would immediately incorporate? Hit Hard has 3 million shares outstanding.
Explanation / Answer
Decrease in market value of firm =$3.3 million/8%= 41.25 million
anticipated decrease in the firm's stock price = 41.25/3= $13.75
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