This textbook is available at## Fundamentals of Financial Management (15th Edition)

Book Edition | 15th Edition |

Author(s) | Brigham |

ISBN | 9781337395250 |

Publisher | Cengage Learning |

Subject | Finance |

SelfTest

SelfTest

Self-Test Questions and Problems

Questions

Problems

Comprehensive/Spreadsheet Problem

Integrated Case

Discussion Questions

Chapter 4, Section 4-8, SelfTest, Exercise 08

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If a firm takes steps that increase its expected future ROE, does this necessarily mean that the stock price will also increase? Explain.

1

ROE = Net Income / Total Equity.

Forecasting an increase in ROE, either the numerator needs to increase, or the denominator needs to decrease. If either (or both) occur, this still does not directly translate into an increase in stock price.

2

Forecasting an increase in ROE, either the numerator needs to increase, or the denominator needs to decrease.

Taking steps to increase expected future ROE does not ensure the stock price will be higher because ROE does not consider risk, and ROE does not consider the amount of capital invested.

Stock price movement is unpredictable, and influenced by both unique and macroeconomic factors.

If a firm takes steps that increase its expected future ROE, this does not necessarily mean that the stock price will increase.

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