Accounting · Financial Management
A company experienced a significant increase in its profit before interest and tax (PBIT). The directors propose a new strategic plan to maintain growth by aggressively cutting discretionary costs, including research and development (R&D) and staff training, to further boost short-term profits. Which of the following statements is the most accurate critique of this plan?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The plan is sound because operational efficiency increases proportionally when R&D assets are written off entirely.
- 2The plan is flawed because it compromises the long-term sustainability of profits and the maximization of shareholder wealth, which is the primary financial objective.✓
- 3The plan is sound because cutting discretionary overheads is universally recognized as the best long-term method for cost control.
- 4The plan is flawed because focusing on PBIT optimization will always reduce the immediate market price of equity shares.
Correct answer
The plan is flawed because it compromises the long-term sustainability of profits and the maximization of shareholder wealth, which is the primary financial objective.
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