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) decline and then rise.

Question

Quizplus · Accepted Answer

An increase in interest rates due to inflation could cause investors to demand a higher return on investment, which could lead to a decrease in stock prices. This is because higher interest rates can make stocks look less attractive compared to fixed-income investments like bonds. If expected cash flows to the firm remain the same, then the stock price could be expected to decrease in response to the increase in interest rates.

If Interest Rates Increase Due to Inflation, but Expected Cash