CFIN -STUDENT EDITION-ACCESS >CUSTOM<
6th Edition
ISBN: 9780357752951
Author: BESLEY
Publisher: CENGAGE C
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Chapter 1, Problem 20PROB
Summary Introduction
To determine: If it’s valid to say that fall in stock price is evidence that managers are not acting in the interest of stockholders
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The 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.
You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency?
Which of the following would not be an appropriate reason for a firm to repurchase its stock:
As an investment if management believes the market has undervalued the stock price.
In order to have sufficient shares to cover employee stock programs.
Solely to boost Earnings Per Share.
Both A and B.
Chapter 1 Solutions
CFIN -STUDENT EDITION-ACCESS >CUSTOM<
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- TRUE 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_forwardTrue 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.arrow_forwardExplain in full detail why the following statement is false: "Financial managers should not focus on the present stock value of the company. Instead, they should focus on the profitability of the company. Doing so will result in increasing the value of the stock.arrow_forward
- Give two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.arrow_forwardCan the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior?arrow_forwardHow do you think accounting irregularities affect the pricing of corporate stock in general? From the investor’s viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities?arrow_forward
- A stock market analyst is able to identify mispriced stock by analyzing the financial statements of the company’s stock. what is the efficiency form of this market? Explain.arrow_forwardIf the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.arrow_forwardGive 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.arrow_forward
- Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Abolishing the Security and Exchange Commission. c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. d. Financing risky projects with additional debt. e. The threat of hostile takeovers.arrow_forwardWhy might stockholders be indifferent to whetheror not a firm reduces the volatility of its cash flows?arrow_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_forward
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