Profit and value of the firm are two concepts which are:
A)Unrelated because cash flow not profit is the main determinant of firm value
B)Closely linked because the present value of a firm's expected future profits approximates to the market value of its securities
C)Closely linked because dividends are paid out of profits and it is dividends that determine the market value of a firm's shares
D)Closely linked because the market value of a firm is determined by its profits multiplied by the price-earnings ratio of its shares

Question

Quizplus · Accepted Answer

The value of a firm is closely linked to its profits because the present value of a firm's expected future profits approximates to the market value of its securities. This is based on the idea that investors are willing to pay a price for a share of stock based on their expectation of future earnings. Therefore, higher profits mean higher market value, and vice versa.

Profit and Value of the Firm Are Two Concepts Which