A Firm Initially Finances Its Assets with Specified Proportions of Debt

question 9

Multiple Choice

A firm initially finances its assets with specified proportions of debt and equity, and then later issues additional debt, using the proceeds to pay a dividend to shareholders.If the new debt has the same priority as the original debt, the value of the original debt will probably fall, an effect called claim dilution.Which of the assumptions of an ideal capital market is violated in this example?

• A)Capital Markets are frictionless
• B)Homogeneous expectations
• C)Atomistic competition
• D)The firm has a fixed investment program
• E)Once chosen, the firm's financing is fixed

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Definitions:

Cholesterol

A type of lipid molecule that is essential for building cell membranes and synthesizing certain hormones, but high levels can increase the risk of heart disease.

Liver

A vital organ involved in metabolism, detoxification, protein synthesis, and several other important biological processes.

Thyroid Gland

An endocrine gland located in the neck, that produces hormones regulating metabolism, energy generation, and growth.

Lymphocytes

A type of white blood cell that is an integral part of the immune system, responsible for the body's defense against pathogens.