Question

Al Quick, the president of a New York Stock Exchange-listed firm, is very short-term oriented and interested in the immediate consequences of his decisions. Assume a project that will provide an increase of $2 million in cash flow because of favorable tax consequences, but carries a two-cent decline in earnings per share because of a write-off against first-quarter earnings. What decision might Mr. Quick make?

Short answer

Answer

Mr. Quick willturn down the project because he is short-term oriented.

Step-by-step solution

Definition of Earnings Per Share

A metric calculates the net income the business generates for each of its outstanding shares, known as earnings per share. It indicates the profitability of the business entity to equity investors.

Decision by Mr. Quick

As Mr. Quick is short-term oriented, he might turn down the project even if it is increasing cash flow because of the adverse reaction of the investor. He feels that investors will have a negative reaction because of a decline in earnings per share to a vast extent.

Even if this decline in the earnings per share is temporary, the investors will consider it a negative signal.