Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 23, Problem 2Q
Summary Introduction
To determine: The reason of indifference between owning the stock of the firm with volatile or with stable cash flow among stockholders.
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Give 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.
Why might stockholders be indifferent to whetheror not a firm reduces the volatility of its cash flows?
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.
Chapter 23 Solutions
Financial Management: Theory & Practice (MindTap Course List)
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Similar questions
- Which of the folowwing statements about a company's stock valuation is incorrect? Select one: a. the value is not a function of the amount of the cash flows(FV) b. an asset which is expected to produce future cash flows has a value which is equilavent to the present value of all those expected cash flows c. the intrinsic value is that value which an investor places on an asset d. the value is a function of the timing of the cash flows(n).arrow_forwardExplain two reasons for the firm management to prefer stock repurchases over cash dividends.arrow_forwardExplain what is meant by the term ‘financial distress’. If we assume that financial distress exists, explain how and why financial distress would cause a firm’s equity to become riskier.arrow_forward
- A negative Cash Flow to stockholder means?arrow_forwardThe 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_forwardWhat is meant by the term ‘financial distress’. If we assume that financial distress exists, explain how and why financial distress would cause a firm’s equity to become more risky.arrow_forward
- Which of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatilearrow_forwardWhich of the following is NOT a conclusion drawn from M&M's Propositions 1 and 2? a. Shareholder's required return rises with leverage. b. The WACC does not change as capital structure change. c. Firm value is determined by the left hand of the balance sheet the firm's assets, and the cash flow generated by them. d. The WACC is determined by the riskiness of the company's business (assets). e. A firm can change its market value by splitting its cash flows into different streams.arrow_forwardThe use of financial leverage by the firm has a potential impact on which of the following? (1) The risk associated with the firm's operations. (2) The risk experienced by the stockholders (3) The variability of operating income (4) The variability of net income (5) The probability of going bankrupt Group of answer choices: 1, 2, 3 1, 3, 5 3, 4, 5 2, 3, 4 2, 4, 5arrow_forward
- What 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_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_forwardis(are)the reason(s) for profit maximization not a reasonable goal for firms. a. Profit concept ignores timing of the returns b. Profit concept ignores the cash flow available to stock holders c. Profit is risky and can be some times loss d. All the abovearrow_forward
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