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 research and development budget can signal to investors that the company may have a lack of innovation and new products in the future, which can result in lower cash flows and lower profits. This can lead to a decrease in the stock price. The stock price is not solely based on reported cash flow and profits, but also on investors' expectations for future growth and profitability.