A Company That Mines Coal on Federally Owned Land Is

question 128

Multiple Choice

A company that mines coal on federally owned land is about to be told by the federal government that, beginning in five years, it must abandon the mine it expected to operate for another twenty years. This will mean a reduction in accounting profits beginning in five years. If the announcement of this ruling was made tomorrow, the price of the firm's stock would fall

• A) in about five years, just before the reduction in accounting profits was to begin.
• B) gradually, as the reduction in the firm's accounting profit drew near.
• C) immediately by the full amount of the discounted value of the decrease in future profit.
• D) immediately because some investors would panic irrationally, whereas smart investors would put the same value on the stock as before, up to the time of the decline in accounting profit.

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