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Social ScienceEvaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on the short term profits at the expense of long-term profits.
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on the short term profits at the expense of long-term profits.
Expert Answer
The statement is false.
Explanation: Stock price fundamentally is based on the all the expected cash flows of the firm be it in the short run, medium run or long run. A share price today is nothing but present value of all the future cashflows the firm will generate.
Such cash flows are discounted at an appropriate discount rate that reflects the risk of the firm. Hence, a manager focussed on maintaining or increasing the stock's price will automatically pay att...
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