Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Question

Quizplus · Accepted Answer

This statement is incorrect. Stable dividends alone do not cause a higher discount rate for the firm. The discount rate is determined by the risk associated with the firm's future cash flows. However, stable dividends can positively impact the perception of the firm's risk and stability, which can lead to a lower discount rate and subsequently increase the value of the firm.

Stable Dividends May Cause a Higher Discount Rate for the Firm