If interest rates increase due to inflation,but expected cash flows to a firm do not change,then you would expect stock prices to A) Rise. B) Rise and then decline. C) Remain unchanged. D) Decline. E) None of the above.

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Quizplus · Accepted Answer

As interest rates increase, the cost of borrowing increases, making it more expensive for companies to borrow money to fund their growth. This can decrease their profits, leading to a decline in their share prices. Additionally, higher interest rates make investing in bonds or other fixed-income securities more attractive, leading investors to shift their money away from stocks, further decreasing stock prices. Therefore, if expected cash flows to a firm do not change but interest rates increase due to inflation, one would expect stock prices to decline.

If Interest Rates Increase Due to Inflation,but Expected Cash Flows