An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; An action that reduces the level of expected cash flows without a corresponding decline in risk should increase share value.

Question

Quizplus · Accepted Answer

The statement is incorrect. An action that increases the level of expected cash flows without a corresponding increase in risk should increase share value. Similarly, an action that reduces the level of expected cash flows without a corresponding decline in risk should reduce share value. This is because investors value firms based on the expected cash flows they generate and the associated risk involved.

An Action on the Part of a Firm That Increases