Why must care be taken when comparing a firm's share price to its operating income?
A)Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders.
B)Both share price and operating income are related solely to equity holders.
C)Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
D)Both share price and operating income are related to the whole firm.

Question

Quizplus · Accepted Answer

Share price is a reflection of the market's expectations for the future performance of the whole firm, while operating income is a measure of the current financial health of the firm. Therefore, care must be taken when comparing the two as they represent different aspects of the firm's finances. Share price is affected by various market factors, such as interest rates, competitors' performance, and general economic conditions, which may not be reflected in operating income. Furthermore, changes in share price could be driven by factors unrelated to the company's operating performance, such as news announcements or rumors. Therefore, comparing share price to operating income may not provide a complete or accurate picture of the firm's financial situation.

Why Must Care Be Taken When Comparing a Firm's Share