In Considering the Arbitrage Process in Perfect Capital Markets with No

question 38

Multiple Choice

In considering the arbitrage process in perfect capital markets with no income taxes, the market value of a firm is ____.

• A) dependent on its capital structure
• B) independent of its capital structure
• C) reliant on stock equity prices
• D) reliant on management expertise

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Definitions:

Consumption Tax

is a tax on spending on goods and services imposed either at the point of sale, collected as a sales tax, or as part of a VAT (value added tax) system.

Income Tax

A tax levied by a government directly on personal, or organizational income.

Double Taxation

The levying of tax by two different authorities on the same income, asset, or financial transaction.

Saving Rate

The percentage of take-home pay that is set aside for savings instead of being used for consumer spending.