If a company\'s prospects erode, it is losing money, and has negative cash flow,

Question

If a company's prospects erode, it is losing money, and has negative cash flow, its stock price will never reach zero because:

Will sell for its break up value

Will sell for its cash flow value

Will sell for a zero price if cash flow is negative

Will sell for its liquidation value rather than its cash flow value

Will sell for its break up value

Will sell for its cash flow value

Will sell for a zero price if cash flow is negative

Will sell for its liquidation value rather than its cash flow value

Explanation / Answer

If a company's prospects erode, it is losing money, and has negative cash flow, its stock price will never reach zero because:

Option D

When a company goes bankrupt, its stock price and value of the company is based in its liquidation value rather than its cash flow value. Even though cash flows are negative, company still has tangoble assets on the balance sheet which are used for liquidation purposes.

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