Which of the Following Is an Assumption of the Modigliani-Miller

question 4

Multiple Choice

Which of the following is an assumption of the Modigliani-Miller theorem?

• A)The dividend growth rate is equal to the expected rate of return.
• B)No arbitrage opportunities exist in the economy.
• C)All firms are financed using equity.
• D)All borrowing and lending activity is at the risk-free rate.

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Definitions:

CAPM

Capital Asset Pricing Model, a framework used to determine the theoretical expected return of an asset or portfolio, taking into account its risk relative to the overall market.

Expected Return

The anticipated profit or loss from an investment, taking into account the probability of varying outcomes.

Pure Time Value

The portion of an option's price that reflects the potential for value change based on the time remaining until its expiration.

Market Risk Premium

The bonus yield an investor projects to receive by placing their money in a risky market portfolio instead of in assets that carry no risk.