If new information becomes available indicating that a company's profits will be much less than previously believed, the flow of funds into the market for its securities will decline
A)unless the expected real interest rate on its securities rises.
B)unless the expected real interest rate on its securities falls.
C)unless the expected real interest rate on its securities remains unchanged.
D)irrespective of changes in the expected real interest rate on its securities.

Question

Quizplus · Accepted Answer

If new information indicates that a company's profits will be much less than previously believed, investors are likely to demand a higher return on their investment to compensate for the increased risk. This increase in required return would cause the expected real interest rate on the company's securities to rise, leading to a decline in the flow of funds into the market for its securities. Therefore, the correct answer is A.

If New Information Becomes Available Indicating That a Company's Profits