When a Market Is Efficient

question 46

Multiple Choice

When a market is efficient:

• A) there is no exchange that can make anyone better off without someone becoming worse off.
• B) a central planner must be involved.
• C) total surplus is zero.
• D) an increase in price will reduce the deadweight loss.

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Definitions:

M&M Proposition I

A principle of corporate finance stating that the value of a firm is unaffected by how it is financed, in the absence of taxes, bankruptcy costs, and asymmetric information.

Interest Tax Shield

The reduction in income taxes that results from taking allowable deductions for interest expenses.

Capital Structure

The mix of different forms of external financing used by a company, including debt, equity, and hybrid securities.

Tax Shield

The decrease in income tax liability achieved by subtracting permissible deductions like mortgage interest or depreciation from one's taxable income.