ABC Company Stock Currently Has a Market Value Equivalent to Its

question 95

Multiple Choice

ABC Company stock currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its level of risk and therefore Marco increases his required rate of return on ABC stock. This change in the required rate of return

• A) will reduce the intrinsic value of ABC stock to Marco.
• B) will increase the intrinsic value of ABC stock to Marco.
• C) will change the intrinsic value but the direction of the change cannot be determined.
• D) is a signal to Marco that he should buy more ABC Company stock.

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Definitions:

Balance Sheet

A financial statement that provides a snapshot of a company's financial condition at a specific time, showing assets, liabilities, and equity.

Lawsuit Loss

Financial damages that a company is required to pay as the result of legal judgment or settlement of a lawsuit.

Probable Loss

An estimated loss from a contingent liability that is likely to occur and can be reasonably estimated.

Fair Value Option

An accounting approach allowing companies to choose to measure certain financial assets and liabilities at fair market prices.