Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of this accident?

Question

Quizplus · Accepted Answer

B) Using a financial calculator, PV of 15 million for 5 years at 10% = $56.86 million;
per share fall = $56.86 million / 55 million = $1.03

Aerelon Airways, a Commercial Airline, Suffers a Major Crash