In a Competitive Market, the Firm Has a Difficult Time

question 36

Multiple Choice

In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the:

• A) firm's cost curves are higher than rivals.
• B) firm's superior productivity is based on value of the whole organization.
• C) firm's superior productivity is based on selected components of superiority within the firm.
• D) demand for the firm's product is inelastic.

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Definitions:

M&M Proposition II

It refers to a theory related to capital structure, stating that a firm's cost of equity increases with leverage because the risk to equity holders increases.

Business Risk

The exposure a company or investor has to various factors that can lower its profits or lead to a loss.

Indirect Bankruptcy Costs

Costs associated with bankruptcy that do not involve direct cash payments, such as damage to a company's reputation or loss of customers.

Optimal Capital Structure

The most favorable mix of debt and equity financing that minimizes the cost of capital and maximizes the value of the firm.