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Give two reasons stockholders might be indifferent between owning the stock of a firm with...

Question:

Give two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.

Earnings Per Share:

Earnings per share is a term used in finance and investments. It refers to a measure of performance that compares earnings to the number of shares a company has outstanding. It is calculated as follows:

Earnings per share = Net income / # of shares outstanding

Answer and Explanation:

Two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows:

1) The stockholder is relying on dividends and the company has a stable dividends policy so cash flow volatility does not matter.

2) The stockholder is relying on share price appreciation and the company's share price continues to push higher because earnings (EPS) is consistently higher.


Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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