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SHAWPNO

on May 20, 2011

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INTRODUCTION PART Q. What is meant by a perfect capital market? Ans. Perfect Capital Market: A perfect capital market exists if the following conditions hold: 1. There are no transaction (brokerage) costs. 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. Q. What role does the perfect capital market assumption play in financial theory? Ans. Role of perfect capital market assumption: 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 c

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