(a) (b) What is the relationship between a firm's profits and its stock price? If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different? Briefly explain.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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5.
An article in the Wall Street Journal contained the following: "Burberry
Group issued a surprise profit warning on Tuesday. ... The announcement sent Burberry's
stock down 21%."
(a)
(b)
What is the relationship between a firm's profits and its stock price?
If the decrease in Burberry's profits had not been a surprise, would
the effect of the announcement on its stock price have been different? Briefly
explain.
Transcribed Image Text:5. An article in the Wall Street Journal contained the following: "Burberry Group issued a surprise profit warning on Tuesday. ... The announcement sent Burberry's stock down 21%." (a) (b) What is the relationship between a firm's profits and its stock price? If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different? Briefly explain.
Expert Solution
Step 1

Stock markets and stock prices react to financial news related to the company.

 

A company announces its financial results in each quarter and the stock market reacts to these results by comparing the announced results with their expected figures.

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