QuestproGompoletion Status: O a. in an income statement is cumulative Ob. in a b

Question

QuestproGompoletion Status: O a. in an income statement is cumulative Ob. in a balance sheet is cumulative OC. in an income statement is no-cumulative O d. both b and c QUESTION 19 A firm's share price o a. depends only on its profitability b. depends on both its riskiness and profitability C. depends only on its riskiness d. none of the above QUESTION 20 If a firm increases profit by taking higher risk O a. its share price will go up its share price will go down C. its share price will not change d: not enough information has been given to make a definite judgement

Explanation / Answer

QUESTION 20 - Option d

Depreciation in income statement is recorded only for the current year. However, on balance sheet the depreciation gets accumulated over the life of an asset reported on balance sheet, before the asset is completely written off the balance sheet.

Question 21 - b

A firm's share price depends upon both its profitability and risk taking. Recall dividend discount model. Price of a share today is present value of dividends expected in future, discounted at required rate of return. Dividends expected in future are function of profitability (higher profitability - higher deividends) whereas required rate of return are influenced by the risk taking of firm. Higher risk taking demands higher required rate of return.

Question 22 - d

As explained in previous question, both profitability and risk taking make an impact on stock price or value. In this question, however, since the magnitude of change in both these factors is not mentioned, we can't ascertain what would their impact be. If rise in profitability is higher than risk taken growth, value of share would increase and vice-versa.

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