EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 20PROB
Summary Introduction
To determine: If it’s valid to say that fall in stock price is evidence that managers are not acting in the interest of stockholders
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You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency?
Which of the following would not be an appropriate reason for a firm to repurchase its stock:
As an investment if management believes the market has undervalued the stock price.
In order to have sufficient shares to cover employee stock programs.
Solely to boost Earnings Per Share.
Both A and B.
True or False
Please answer both.
1. High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price.
2. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase the firm's profitability.
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- Explain in full detail why the following statement is false: "Financial managers should not focus on the present stock value of the company. Instead, they should focus on the profitability of the company. Doing so will result in increasing the value of the stock.arrow_forwardTRUE or FALSE: Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.arrow_forwardGive two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.arrow_forward
- A stock market analyst is able to identify mispriced stock by analyzing the financial statements of the company’s stock. what is the efficiency form of this market? Explain.arrow_forwardHow is it possible for an employee stock option to be valuable even if the firms stock price fails to meet shareholders expectations?arrow_forwardIndicate whether its TRUE or FALSE. Then provide a complete explanation! Financial risk is reflected in the variability in the returns a company may generate on its assets and is mainly driven by the risks inherent in the industry that the company operates in. Introducing leverage into a firm’s capital structure may increase the expected returns for shareholders but the impact on share price may still be uncertain.arrow_forward
- If the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.arrow_forwardGive two reasons stockholders might be indifferent between owning the stock of a firmwith volatile cash flows and the stock of a firm with stable cash flows.arrow_forwardWhy might stockholders be indifferent to whetheror not a firm reduces the volatility of its cash flows?arrow_forward
- Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Abolishing the Security and Exchange Commission. c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. d. Financing risky projects with additional debt. e. The threat of hostile takeovers.arrow_forwardWhat are the TWO primary advantages of using CAPM over DDM? It adjusts for risks It does not explicitly consider risk Applicable to companies that pay steady dividends Applicable to companies that pay no dividendsarrow_forwardWhat are some of the risks an investor would face when investing in a stock? In addition to the business risk coming from the type of business environment that your company operates in, what additional risk would be of concern to an investor? The company might be mismanaged and do poorly or go out of business. The company's stock market return might be wildly unpredictable as the operating performance might be unstable. The company's competitors might do a better job and take market share away? The list goes on and on... What risks would you face if you bought 100 shares of Tesla?arrow_forward
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