Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 24, Problem 2Q
Summary Introduction
To discuss: The two reasons of indifference between owing the stock of the company with volatile or with stable cash flow among stock holders.
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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 24 Solutions
Intermediate Financial Management (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 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_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_forward
- 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 more risky.arrow_forwardWhich 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_forward
- The 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_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_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_forward
- is(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_forwardWhich of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset Selectionarrow_forwardThe cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond. Group of answer choices True Falsearrow_forward
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