90.2K

Verified Solution

Link Copied!

An article in the Wall Street Journal contained the following: "Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent Burberry's stock down 21%."

Source: Paul Sonne and Peter Evans, "Burberry Sends a Warning," Wall Street

Journal,

September 12, 2012.

Buying stock in a company gives an investor a legal claim on _____.

A.

the value of a firm's assets minus the value of its liabilities

B.

a firm's equity

C.

a firm's profits

D.

all of the above

If a firm's profits are expected to increase there will be

an _____ in demand for that firm's stock and therefore ____ in its price.

If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different?

A.

Yes, investors would not have been as surprised by the announcement and would not have sold their shares, thus keeping the price stable.

B.

No, it does not matter when investors knew about the decrease in profits since they are not allowed to sell their stocks until after the announcement.

C.

Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made.

D.

No, before the announcement there is not complete certainty that profits will decrease therefore all investors will wait for the official announcement.

Answer & Explanation Solved by verified expert

See Answer