Capital structure is irrelevant if:I) capital markets are efficient;II) each investor can borrow/lend on the same terms as the firm;III) there are no tax benefits to debt Multiple ChoiceA) III onlyB) I onlyC) II onlyD) I, II, and III

Lesson - Since a firm's capital structure decision does not affect investors' cash flow…

Answered: Capital structure is irrelevant if: I)…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Capital structure is irrelevant if:

I) capital markets are efficient;
II) each investor can borrow/lend on the same terms as the firm;
III) there are no tax benefits to debt

Multiple Choice

A) III only

B) I only

C) II only

D) I, II, and III

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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