Everything else equal, if stockholders prefer current income to future income (i.e., capital gains), a firm's cost of equity will:

Question

Quizplus · Accepted Answer

If stockholders prefer current income, the firm's cost of equity will be lower if it pays more dividends. This is because investors value current cash flows more than future cash flows, which means they are willing to accept a lower return on their investment if it comes in the form of current dividends. Therefore, increasing the dividend payout will lower the cost of equity.

Everything Else Equal, If Stockholders Prefer Current Income to Future