Variation in personal tax rates and transaction costs across both investors and securities may differentially affect the values of corporate securities.Also a firm faces substantial transaction costs in issuing securities, which may inhibit its ability to undertake otherwise profitable capital investments.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

The scenarios described violate the assumption that capital markets are frictionless. In an ideal, frictionless market, there would be no transaction costs or taxes affecting the values of securities, and firms would not face substantial costs in issuing securities.

Variation in Personal Tax Rates and Transaction Costs Across Both