Use the Following to Answer Question(s): Markets and Efficiency

question 43

Multiple Choice

Use the following to answer question(s) : Markets and Efficiency

-(Exhibit: Markets and Efficiency) The price and marginal cost in Panel(a) are equal because of:

• A) the marginal decision rule.
• B) the law of demand.
• C) the law of supply.
• D) the law of increasing cost.

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Definitions:

Static Theory of Capital Structure

A financial hypothesis that suggests there is an optimal capital structure for a company where the cost of capital is minimized, and the value of the firm is maximized.

M&M Proposition I

A theorem stating that in a perfect market, the market value of a company is unaffected by how that company is financed, regardless of whether through debt or equity.

Debt

An amount of money borrowed by one party from another, to be repaid with interest.

M&M Proposition II

A theory in corporate finance that asserts the cost of equity is a linear function of the company's debt/equity ratio, under the assumption of no taxes and financial distress costs.