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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Orlan plc's board plans to boost the share price by cutting research spending sharply for two years, which will lift reported profit immediately. Which risk to shareholder value does this decision most clearly illustrate?

This illustrates short-termism. Cutting research spending raises reported profit now but reduces future growth and cash flows, so long-term shareholder value is harmed even if the share price rises temporarily.

  1. AShort-termism, sacrificing long-term value for near-term earningsCorrect
  2. BExcessive gearing from too much debt finance
  3. CTranslation exposure from foreign subsidiaries
  4. DAgency cost arising from overinvestment in assets

Explanation

Cutting discretionary spending such as research to lift current profit sacrifices future cash flows, which is short-termism. Gearing and translation risk are not involved. Overinvestment is the opposite behaviour.

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