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 higher than profits reported in 2009.

Question

Quizplus · Accepted Answer

Investors may view the reduction in research and development budget as a negative signal for future growth potential and innovation, leading to a decrease in stock price. The value of stock is influenced by a variety of factors, including reported cash flow, but also earnings, growth prospects, and other fundamental and market factors. Therefore, A, C, and D are less likely to be accurate or comprehensive statements.