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

question 2

Multiple Choice

Why must care be taken when comparing a firm's share price to its operating income?

• A) Both share price and operating income are related to the whole firm.
• B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders.
• C) Both share price and operating income are related solely to equity holders.
• D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

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Definitions:

Death Spiral

A term often used in insurance and pricing strategies to describe a situation where pricing adjustments lead to reduced participation or purchase, necessitating further price increases, and thus accelerating a decline in demand or viability.

Health Insurance

A type of insurance coverage that pays for medical and surgical expenses incurred by the insured as a part of a health care system.

Premiums

Payments made regularly to an insurance company or the additional amount above the normal price.

Private Insurance Companies

Independent firms that offer policies to individuals or entities to cover various risks in exchange for premium payments.