Question

XYZ Ltd. is a large retail company listed on a major stock exchange, and its reported net income for the year ended December 31, 2015, is $ 5 million. The earnings were announced to the public on March 31, 2016.
Financial analysts had predicted the company’s net income for 2015 to be $ 7 million. The financial analysts’ prediction of $ 7 million net income was in effect up until the release of the 2015 earnings on March 31, 2016.
Assumptions
No other news about XYZ Ltd. was released to the public on March 31, 2016.
No significant economy- wide events affecting share prices occurred on March 31, 2016.

Required
a. Would you expect a change in price of XYZ Ltd.’s common stock on March 31, 2016? If so, why?
b. Consider the two situations below:
i. The deviation of forecasted earnings from actual earnings of $ 2 million is completely accounted for by the closing down of a number of its retail outlets.
ii. The deviation of the forecasted earnings from actual earnings of $ 2 million is completely accounted for by a fire in XYZ Ltd.’ s largest retail outlet, which had caused the outlet to be closed temporarily for six months. In which of these two scenarios would you expect the price change of XYZ Ltd.’ s common stock to be greater? Explain.
c. Suppose instead that significant economy- wide events on March 31, 2016 resulted in a major increase in the stock market index.
Would this affect your answer in part a? Explain.



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  • CreatedSeptember 09, 2014
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