Question

1. There are some that say that U.S. firms concentrate too much on short-term profits and not enough on long-term profits. Do you agree? How does this conflict with the valuation of stock based on future cash flows.

Answer 1

Firms concentrating more on short term profits than long term are said to be short Termism which can be because of many reasons like shareholders pressure new technology and most importantly unexpected business trends though short term profits help to judge who is performing well and who not but this does not look for long term growths as all there focus is earning profits for short term and this may happen when investment hurdle rate is much higher than cost of capital and this is all mostly done because of shareholders

on other hand future cash flows means the project that we are investing now may start giving benefits even before it is started and it focuses on project or asset which are of long term where benefits we are receiving in advance so it is different from short termism as there focus is on short term objectives and here on long term objectives