IBM just reported that a Tornado destroyed its massive factory in Kanas. The impact is to decrease its free cash flow by

$182

million in one year and by

$62

million at end of the following year. The cost of capital is

12.2%.

a. If IBM has

37

million shares outstanding, what would you expect to happen to the share price upon this announcement. Assume this information was only revealed to the market at this announcement, and the value of its debt is not affected. If you think it will decrease, sign your answer as negative. If you think it will increase, sign your answer as positive.

b. Would you expect to be able to make a profit by selling IBM's stock right after this announcement? Explain.

Answer rating: 100% (QA)

a To assess the impact of the factory destruction announcement on IBMs share price we need to consider the change in free cash flow and the cost of ca... View the full answer