The Law of One Price Is Based on the Theory

question 67

True/False

The law of one price is based on the theory behind purchasing power parity, in that in the long run exchange rates move toward rate that equalize the prices of identical basket of goods and services in any two countries.

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Definitions:

MM Model

The Modigliani-Miller theorem, proposing that in a perfect market, the value of a firm is unaffected by how it is financed, whether through debt or equity.

Financial Leverage

The use of borrowed funds with a fixed cost to enhance the potential return on investment.

Bankruptcy Risk

The risk that a company will be unable to meet its financial obligations and thus may have to declare bankruptcy.

Operating Leverage

A measure of how sensitive a company's operating income is to a change in revenue, indicating the level of fixed versus variable costs.