As the Expected Future Exchange Rate for Dollars Increases

question 295

Multiple Choice

As the expected future exchange rate for dollars increases,

• A) the demand for U.S. dollars increases.
• B) the supply of U.S. dollars decreases.
• C) the U.S. interest rate will fall.
• D) Both answers A and B are correct.

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Definitions:

Modigliani And Miller Model

A financial theory proposing that the market value of a company is determined by its earning power and the risk of its underlying assets, and is independent of its capital structure.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity used to finance its overall operations and growth.

Stock Price

The cost of purchasing a share of a company's stock. The price at which a stock is traded on the market, representing the value investors assign to a company.

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.