Southern airline inc.announced that its net income in the first quarter jumped percent to $100 million...

Southern airline inc.announced that its net income in the first quarter jumped percent to $100 million as number of passenger climbed. The airline also booked of $40 million from the sales of 2 aircraft. According to the survey of 6 analysts average estimate of the first quarter net income for the airline was $200 miliion. After earning announcement what would be the possible movement of the company's stock. Please explain with any financial concepts and theories?

Solutions

Expert Solution

The stock price of the Southern Airline Inc. would go down.

There are two reasons for this analysis:

1) The net income for the quarter missed the analyst estimates by a huge margin of $100 million. This would show that the business had not been profitable as expected. This would lead to weakening of the investors' faith in the company and hence would lead to a decrease in stock price.

2) A great chunk of the net income in quarter 1 is generated due to sale of the 2 planes which means that the growth in business of the airline has not been good. The sale of planes is a one time event and hence it is unlikely that this would be replicated in the quarter as well which means that the net income of the company should go down. Also,as they have sold planes the business is likely to suffer as they will have less planes from which they can generate revenues. This would reduce the revenues and hence the net income. Thus the stock price should drop.

jeff jeffy answered 1 month ago

Next > < Previous

Related Solutions

Southern airline inc.announced that its net income in the first quarter jumped percent to $100 million...

Company A has an annual income of $100 million and net profit is %20 , and...

Company A has an annual income of $100 million and net profit is %20 , and the owner wants to establish a project at a cost of $300 million. Is the project should financed from the income of Company A or financed from bank, and why?

Equity in Net Income and Noncontrolling Interest in Net Income Palm Resorts acquired its 70 percent...

Equity in Net Income and Noncontrolling Interest in Net Income Palm Resorts acquired its 70 percent interest in Sun City on January 1, 2017, for $41,750,000. The fair value of the 30 percent noncontrolling interest at the date of acquisition was $14,750,000. Sun City’s date-of-acquisition reported net assets of $5,000,000 were carried at amounts approximating fair value, but it had unrecorded identifiable intangibles, capitalizable per ASC Topic 805, valued at $7,500,000. These intangibles are determined to have limited lives, amortized...

Equity in Net Income and Noncontrolling Interest in Net Income Palm Resorts acquired its 70 percent...

Equity in Net Income and Noncontrolling Interest in Net Income Palm Resorts acquired its 70 percent interest in Sun City on January 1, 2017, for $41,750,000. The fair value of the 30 percent non‑ controlling interest at the date of acquisition was $14,750,000. Sun City’s date‑of‑acquisition reported net assets of $5,000,000 were carried at amounts approximating fair value, but it had unrecorded identifiable intangibles, capitalizable per ASC Topic 805, valued at $7,500,000. These intangibles are determined to have limited lives,...

ABC Corp has net income of $75 million, total liabilities of $100 million, 45% of which...

ABC Corp has net income of $75 million, total liabilities of $100 million, 45% of which is interest-bearing debt at 8% interest. The ROE for XYZ is 15% and the tax rate is 25%. Find ABC’s ROA and ROIC.

Suppose a firm has a retention ratio of 27 percent and net income of $4.2 million....

Suppose a firm has a retention ratio of 27 percent and net income of $4.2 million. How much does it pay out in dividends? (Enter your answer in dollars not in millions.)

A project has an initial capital expenditure (capex) of $100 million and generates net income of...

A project has an initial capital expenditure (capex) of $100 million and generates net income of $9 million dollars in year 1. For the next 30 years, net income will grow 8 percent each year. The project will continue to operate indefinitely. The estimated continuation value of the project at the end of year 30 is $20 million dollars. The CCA rate on the capital expenditure is 10 percent and the marginal corporate tax rate is 20 percent. No additional...

Consider a firm that is 100% equity financed. The expected net operating income is 200 million,...

Consider a firm that is 100% equity financed. The expected net operating income is 200 million, the corporate tax rate is 35%, and the cost of capital is 8%. (a) Construct the balance sheet. (b) The firm decides to borrow 1000 million at the interest rate 5%. The proceeds are used to repurchase equity in the same amount. Construct the balance sheet with debt financing taking into account the tax deductability of interest. (c) What is cost of equity after...

Byron Books Inc. recently reported $18 million of net income. Its EBIT was $28.6 million, and...

Byron Books Inc. recently reported $18 million of net income. Its EBIT was $28.6 million, and its tax rate was 25%. What was its interest expense? (Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $18 million of net income by (1 - T) = 0.75 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.) Write...

Byron Books Inc. recently reported $15 million of net income. Its EBIT was $33 million, and...

Byron Books Inc. recently reported $15 million of net income. Its EBIT was $33 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $15 million of net income by (1 - T) = 0.6 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.] Write...

Subjects