Which of the Following Assumptions in Asset Pricing Under the Modigliani-Miller

question 12

Multiple Choice

Which of the following assumptions in asset pricing under the Modigliani-Miller theorem that is consistent with all pricing models?

• A)Return on assets is always by the way of capital gains.
• B)The dividend growth rate is equal to the expected rate of return.
• C)Firms are either financed by debt or by equity.
• D)Equilibrium prices cannot provide opportunities for riskless arbitrage profits.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales activities, such as rent, salaries, and insurance.

Net Income

The company's net income following the deduction of all expenses and taxes from its total revenue.

Variable Costs

Expenses that fluctuate in proportion to the level of output or activity, such as raw materials and direct labor costs.

Fixed Costs

Expenditures that do not vary with the degree of output or sales, for instance, rental fees, wages, and insurance premiums.