EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
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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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.
Indicate whether the following statements are (True) or (False) and correct the false statements:
Primary and secondary markets are markets for short-term and long-term securities, respectively.
Public offering is the sale of a new security issue, typically bonds or preferred stock, directly to an investor or group of investors.
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.
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?
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Similar questions
- Which of the following statements is CORRECT? One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the capital structure. The threat of takeover generally increases potential conflicts between stockholders and managers. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. The threat of takeovers tends to reduce potential conflicts between stockholders and managers. The creation of the Securities and Exchange Commission (SEC) eliminated conflicts between managers and stockholders.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 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_forward
- Which of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.arrow_forwardA 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_forwardTo what extent does the company’s dividend policies support or hinder their strategies? For example, if the company is attempting to grow, are they retaining and reinvesting their earnings rather than distributing them to investors through dividends? Be sure to substantiate claims.arrow_forward
- 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_forwardTo what extent do you feel the company’s dividend policies support or hinder their strategies? For example, if the company is attempting to grow, are they retaining and reinvesting their earnings rather than distributing them to investors through dividends? Be sure to substantiate your claims.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
- The small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.arrow_forwardWhich one of the following action will not lead to reducing financial risk? Issuing bonus shares Issuing equity shares Issuing preferred stock Reducing dividendarrow_forwardHow might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? please support by evidencearrow_forward
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