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What Is the Logic Behind the Theory of Purchasing-Power Parity

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What is the logic behind the theory of purchasing-power parity?


Definitions:

Capital Structure

The mix of various forms of capital used by firms to fund their operations and growth, typically referring to the blend of debt and equity.

M&M Proposition II

A theory in corporate finance stating that the cost of equity is a linear function of the company's capital structure, formulated by Modigliani and Miller.

Cost of Equity Capital

The return that investors expect for investing in a company's equity, essentially the cost of raising equity capital for the firm.

Equity Capital

Funds raised by a company through the sale of common or preferred stock to investors.

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