High Tech Corp.cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year.Which of the following statements is MOST correct?
A)The stock price will likely increase because the value of stock is based on reported cash flow.
B)The stock price may decrease because investors may predict that future cash flows will decrease due to the lack of innovation and new products.
C)The change will have no impact on stock price because the company's profits will not change in 2010.
D)The stock price will increase only if reported profits in 2010 are also higher than profits reported in 2009.

Question

Quizplus · Accepted Answer

Cutting the research and development budget may be seen as a lack of investment in the company's future, which could lead investors to believe that future cash flows and profits will decrease due to a lack of innovation and new products. This could potentially cause the stock price to decrease.