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Defining the Perfect Capital Market

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Define the three conditions that make up a perfect capital market, and then compare and contrast the effects of perfect capital markets to the imperfect capital markets on value.

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The three conditions which define a perfect capital market include:

1) Weak form, meaning that ALL of the information has been made public to the financial and investment communities, and thus prices relating to investment designations are relatively stable based upon the availability of this information --- that is, there is a perfectly level playing field;

2) Semi-strong, meaning that there is still some information available which has not been disclosed, which ultimately will result in some form of price changes in securities to offset this potential lack of (or unavailability) of information;

3) Strong, meaning that there is a great deal of information unavailable to the investing public, and to the financial community, which can result in significant changes in investment securities causing potentially wide swings in pricing of these securities (might include insider trading info, as well as privately held information which has not been released).

Imperfect capital markets essentially imply that it is a free for all --- that we all have to gain whatever info we need in order to make the ...

Solution Summary

Capital markets provide investment funding for firms based upon the assumption that quality information is available to all at the same time. This review examines the types of capital markets, the effects of competition within these markets, and the decision matrix required to function within this arena.

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I need original notes that exceed 250 words that will help me answer the questions below:

1. Define the three conditions that make up a perfect capital market, and then compare and contrast the effects of perfect capital markets and imperfect capital markets on value. Can they create or destroy value? Explain.

2. Define EBIT and discuss why the optimal level of leverage from a tax-saving perspective is the level at which interest equals EBIT. Does this have a connection with under-leveraging corporations,both domestically and internationally?

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