& P 10-21 (similar to) -Question Help * Roybus, Inc., a manufacturer of flash me
ID: 2795449 • Letter: #
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& P 10-21 (similar to) -Question Help * 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 $183 million at the end of this year and by $55 million at the end of next year a. If Roybus has 40 million shares outstanding and a weighted average cost of capital of 12.1%, 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 40 million shares outstanding and a weighted average cost of capital of 12.1%, 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.)Explanation / Answer
Change in free cashflow=
Year 1= 183/1.121+ 55/(1.121)2= 163.25+ 43.77= 207.017$ million is the value of firm for equity shareholders.
For each share it would be 207.017$/40= 5.175$ per share.
So the price of The share would drop by 5.17$ per share.
No, on hearing thus announcement free cashflow flow for equity shareholders would drop by 5.175$ per share, so we will not be able to make a profit.
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