Reuben Is Visiting the Aquarium and Has Just Seen an Octopus

question 40

Multiple Choice

Reuben is visiting the aquarium and has just seen an octopus for the very first time. Reuben is therefore likely to have

• A) a definition for the concept of octopus.
• B) only exemplar-based knowledge for the concept of octopus.
• C) a prototype for the octopus concept.
• D) a prototype for the octopus concept and some exemplar-based knowledge.

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Definitions:

Static Theory of Capital Structure

A financial hypothesis that suggests there is an optimal capital structure for a company where the cost of capital is minimized, and the value of the firm is maximized.

M&M Proposition I

A theorem stating that in a perfect market, the market value of a company is unaffected by how that company is financed, regardless of whether through debt or equity.

Debt

An amount of money borrowed by one party from another, to be repaid with interest.

M&M Proposition II

A theory in corporate finance that asserts the cost of equity is a linear function of the company's debt/equity ratio, under the assumption of no taxes and financial distress costs.