A perfect capital market is a financial market where investors trade in stocks. In this type of market there is no arbitrage opportunities. When dividends are brought forward in a simple perfect capital market instead of been distributed, it has no effect at all on the price of the share.
c. In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. d. In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases.
If a capital market has the following characteristics then it would be considered as a perfect capital market. In perfect capital market case, assuming complete markets, perfect rationality of agents and under full information, the equilibrium occurs where the interest rates clear the market, with the supply of funds equal to the demand.
- Finance has been greatly influenced by the theory of perfect competition. With its assumptions of many buyers and sellers, perfect information etc., the idea of frictionless markets is unconvincing as a model of many industries.
In perfect capital market case, assuming complete markets, perfect rationality of agents and under full information, the equilibrium occurs where the interest rates clear the market, with the supply of funds equal to the demand. There is no transaction (brokerage) cost. There are no taxes.
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4. Which of the following statements is FALSE? A. The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.
What is meant by a perfect capital market? 1 There is no transaction (brokerage) cost. 2 There are no taxes. 3 There are large numbers of buyers and sellers, so the actions of no one buyer or seller affect the price of the traded security. 4 Both individuals and firms have equal access to the market. 5 There is no cost to obtain information, so everyone has the same information. 6 Everyone has the same (homogeneous) expectations. 7 There are no costs associated with financial distress.
Clearly, most of these assumptions do not hold in the real world-taxes and brokerage costs exist, individuals often do not have the same access to markets as corporations, managers often have more information about their firms’ prospects than do outside investors and so on.
Both individuals and firms have equal access to the market. There is no cost to obtain information, so everyone has the same information. Everyone has the same (homogeneous) expectations. There are no costs associated with financial distress.
In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. d. In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases.
1. Option A is False. In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is th … View the full answer
In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. d. In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases.
1. Option A is False. In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is th … View the full answer