Question

g "1. How would each of the following events change the equilibrium financial market value of a company? (a)an increase in its cost of production; (b) an increase in its cost of financing; (c) an increase in the market’s discount rate; (d) an increase in its sales revenue; and (e) an increase in its projected future profits."

Answer 1

Answer:

a. Decrease

b. Decrease

c. Decrease

d. Increase

e. Increase

Explanation:

a. When the company's cost of production increases, this reduces the amount of profits they make. A lower than expected profit margin is frowned upon in the Financial market therefore some people will sell their shares in the company which will have the effect of decreasing market value.

b. An increase in a firm's cost of financing signals an increase in the riskiness of a company. It also means that the company will be paying more on interest which will reduce profits. These 2 thing will drive some investors away thereby reducing the market value.

c. A firm's value can be found by discounting its projected sales and dividends amongst others with a certain discount rate. If a higher rate is used, the present value and hence the market value figure will be less.

d. When there is an increase in Sales revenue, it signals profitability for a company. Investors love profitable companies and will buy more of the company stock which will drive up the price.

e. Projected future profits can be used to calculate present value as well as serve as an indication of future profitability. Investors will buy more shares and drive up the market value.