Question

Asked Feb 14, 2019

4353 views

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.

1 Rating

Step 1

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.

Step 2

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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