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.
1. 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.)
2. Consider the following two scenarios:
a. The $200 million difference between AMD’s management forecast and analysts’ forecast is completely attributable to a previously reported month long labor strike at one of AMD’s manufacturing facilities.
b. The $200 million difference between AMD’s management forecast and analysts’ fore- cast 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)?