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Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in...

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Accounting

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

$177

million at the end of this year and by

$62

million at the end of next year.a. If Roybus has

32

million shares outstanding and a weighted average cost of capital of

12.7%,

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.

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