On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%.
Which of the following is the least likely consequence of such an announcement?
A) The price of the stock would rise due to the pressure to buy.
B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.
C) Investors would increase their forecast of future cash flows in that firm.
D) Investors would revise their estimates of the net present value (NPV) of the firm.
Cash flows refer to the inflow and outflow of cash and cash equivalents which affect the liquidity of firm. Any positive news about the project would have a positive impact on the cash flows from the project.
Answer and Explanation:
The correct answer is B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.
The chances are very less that the investors would determine that value of the firm prior to the announcement was high. Hence, this option is incorrect.
Reasons for Incorrect options:
A) The price of the stock will rise as the demand of the stock will increase immediately after such announcement.
C) After the announcement, the investors would expect higher returns so the forecast of the future cash flows increases.
D) The NPV would revise after the announcement as it will increase the inflows of the project.
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from Corporate Finance: Help & ReviewChapter 8 / Lesson 7