Which of the following statements is false?
A) Financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors.
B) The NPV of trading a security in a normal market is zero.
C) We cannot separate a firm's investment decision from the decision of how to finance the investment.
D) In normal markets, trading securities neither creates nor destroys value.

Question

Quizplus · Accepted Answer

The statement C is false because in financial theory, a firm's investment decision (which projects to invest in) can indeed be separated from its financing decision (how to pay for those investments). This principle is known as the separation theorem or the Modigliani-Miller theorem, which under certain conditions, suggests that the value of a firm is unaffected by how it is financed.

Which of the Following Statements Is False