Question

11. Stock Valuation [LO1] Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.

Answer 1

The statement is a wise recommendation because the managers should focus on adding long term value to the organisation rather than short term profits. Keep extra attentiuon on the word value rather than profits. Short term profits may be good for a headline in Business standard but shareholders are always if the manegement is creating some value with the profits. As they say, create value and profits will follow. Take Apple and Tesla as for example, innovative ideas of both firms added value and now Apple is the most valued company with a target of $1 Trillion in next 5 years. Always remember the principle of going concern, short term decisions are cover ups but long term decisions are helpful in creating profits.

Stock ownership of the management may lead to corrupt practices but the regulations these days are tight enough to stop such malpractices.