If the price of a stock equals the present value of expected future dividend payments, then when the firm expects losses in the future due to a downturn in the economy, we should expect that the price of the stock should:

Question

Quizplus · Accepted Answer

If the firm expects losses in the future due to a downturn in the economy, this means that the expected future dividend payments will be lower than previously expected. As a result, the present value of these payments will also be lower, leading to a decrease in the price of the stock. Therefore, we should expect the price of the stock to decrease.

If the Price of a Stock Equals the Present Value