In: Finance
Marion Manufacturing, a steel company, announces that it will be taking a ma-
jor restructuring charge that will lower earnings this year by $500 million. As-
sume that the charge is not tax deductible and has no effects on operations.
a. What will the effect of this charge be on the value of the firm?
b. When the firm announces the charge, what effect would you expect it to
have on the stock price? Is your answer consistent with your response to
question (a)?
In the given situation Marion Manufacturing, a steel company, announced that it will be taking a major restructuring charge that will lower its earnings by $500 million.
Case A: The effect of the charge on the value of the firm:
Various companies undergo restructuring due to various reasons. This cost or charge is shown as a line item on the income statement and is used for calculating the operating income. This charge is non-cash expense and it does not directly impact the finances of the company. Unless there is a material change in earnings, cash flow and leverage, the impact of impairment on a company's valuation is negligible.
Case B: The effect of the charge on the stock price of the firm:
As the impairment charge has a negligible impact on the value of the firm, this will not have a major impact on the stock price of the company as it is a non-cash expense.
Yes, the impairment charge has negligible impact on both the value of the firm and the stock price of the firm.