Transaction costs and personal taxes may affect investors' ability to undertake arbitrage.Also, a firm's earnings are taxed, and interest payments are deductible while dividends are not.These are examples of the violation of which of the assumptions of an ideal capital market?
A)Capital Markets are frictionless
B)Homogeneous expectations
C)Atomistic competition
D)The firm has a fixed investment program
E)Once chosen, the firm's financing is fixed

Question

Quizplus · Accepted Answer

These examples illustrate the violation of the assumption that capital markets are frictionless. In an ideal, frictionless market, there would be no transaction costs, taxes would not affect investment decisions, and all forms of income would be treated equally.

Transaction Costs and Personal Taxes May Affect Investors' Ability to Undertake