Hi, I have some questions about managerial finance. I do not really understand them so can u plz help me out!!
Thx
Here are the questions:
1. High earnings per share (EPS) do not necessarily translate into a high fundamental stock price. TRUE or FALSE and WHY?
2. Higher risk tends to result in a higher share price since the stockholder must be compensated for the greater risk. TRUE of FALSE and WHY?
3. Due to agency problems it is often best for shareholders to run their own firms. TRUE of FALSE and WHY?
4. Marginal analysis states that financial decisions should be made and actions taken only when added benefits exceed added costs. TRUE or FALSE and WHY?
5. The higher the free cash flows (FCF) that a given firm generates the higher will be its fundamental value. TRUE or FALSE and WHY?
6. 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.
TRUE or FALSE and WHY??
Thank you for your help.
I can get you started --
1. Investors in stocks are fickle. Often they'll bid up the price of a stock if EPS rise. But -- it doesn't always happen. I've seen stocks that continually increase their EPS for three or four years, but the price of the stock doesn't change much. Part of a stock price is what investors think the stock is going to do in the future. If shareholders bid up the price of a stock so that future growth is considered in this price, the stock price may not move much.
Higher risk has little to do with stock prices. So-called penny stocks -- and those that sell for a dollar or two a share are usually the riskiest stocks, while Google is trading around $650 a share.
Now it's your turn. What do you think the other answers are?
these were my midterm managerial finance questions!! where did u get these from ??
Of course, I'd be happy to help! Let's go through each question one by one:
1. High earnings per share (EPS) do not necessarily translate into a high fundamental stock price. TRUE or FALSE and WHY?
The statement is TRUE. While high EPS is generally an indicator of a company's profitability, it does not guarantee a high stock price. The stock price is influenced by a wide range of factors, including market conditions, investor sentiments, industry trends, and company's growth prospects. Therefore, other factors beyond EPS must be considered to determine a stock's fundamental value.
To understand this further, you can look at other financial indicators such as price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, market capitalization, industry multiples, and comparable companies' valuations.
2. Higher risk tends to result in a higher share price since the stockholder must be compensated for the greater risk. TRUE of FALSE and WHY?
The statement is FALSE. In general, higher risk is associated with a higher required rate of return for investors, which can potentially lead to a lower share price. Investors demand compensation for taking on additional risk, which means they may require a higher return on their investment to invest in a riskier stock. This higher required rate of return can lead to a decrease in the stock price. It's important to note that stock prices are determined by the interaction of supply and demand in the market, which can be influenced by various factors beyond risk.
To evaluate the relationship between risk and stock price, you can consider measures such as beta (a measure of systematic risk), volatility, risk premiums, and historical stock price movements.
3. Due to agency problems, it is often best for shareholders to run their own firms. TRUE of FALSE and WHY?
The statement is FALSE. Agency problems refer to conflicts of interest that can arise between shareholders and managers in a company. While agency problems can exist, allowing shareholders to run the firm is not necessarily the best solution. Shareholders might lack the necessary expertise, knowledge, and time commitment to effectively manage the day-to-day operations of a company. Therefore, professional managers are often appointed to run the company on behalf of shareholders. Effective corporate governance mechanisms, such as boards of directors and executive compensation structures, can be put in place to align the interests of managers and shareholders.
To better understand agency problems and corporate governance, you can explore topics such as principal-agent theory, managerial incentives, shareholder activism, and the role of boards of directors.
4. Marginal analysis states that financial decisions should be made and actions taken only when added benefits exceed added costs. TRUE or FALSE and WHY?
The statement is TRUE. Marginal analysis is an economic principle used to evaluate the benefits and costs of taking an additional action or making incremental changes. In the context of financial decision-making, the principle suggests that decisions should be made if the additional benefits from the decision outweigh the additional costs incurred.
For example, when making investment decisions, a financial manager should assess whether the expected return on the investment exceeds the cost of financing it. Similarly, when considering financing options, a financial manager should compare the cost of different financing sources and choose the one with the lowest overall cost.
Understanding marginal analysis involves comparing marginal benefits and marginal costs, analyzing incremental changes, and conducting cost-benefit analyses.
5. The higher the free cash flows (FCF) that a given firm generates, the higher will be its fundamental value. TRUE or FALSE and WHY?
The statement is TRUE. Free cash flow (FCF) is a measure of the cash available to a company after expenses, taxes, and investments in fixed assets and working capital have been accounted for. FCF represents the excess cash that can be used for various purposes, such as paying dividends, reducing debt, making acquisitions, or investing in growth opportunities. Therefore, a higher FCF implies greater financial flexibility and the ability to create value for shareholders.
To assess the fundamental value of a company, analysts often use discounted cash flow (DCF) models, which consider the company's expected future cash flows, including FCF, and discount them back to the present value.
6. 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. TRUE or FALSE and WHY?
The statement is FALSE. While profitability is an important factor to consider in financial decision-making, it is not the only factor that should be taken into account. Financial managers should also consider other objectives, such as long-term growth, risk management, liquidity, and shareholder value creation. By pursuing multiple objectives and considering a broader range of factors, financial managers can make more informed and balanced decisions.
To analyze financial decisions comprehensively, financial managers can assess various financial ratios, financial statements, industry benchmarks, and conduct scenario analyses to understand the potential impacts on profitability, growth, risk, and value creation.
I hope these explanations have been helpful! If you have any further questions, feel free to ask.