Capital structure decisionsan understanding of the concepts

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Capital structure decisions

An understanding of the concepts of complete markets and spanning are essential for an understanding of the literature on unanimity and several other topics covered in this course.

a) What is the difference between spanning and a complete market? If a particular security is spanned, does that mean the market is complete? If all securities are spanned by other securities, is the market complete?

b) What assumption concerning market completeness and/or spanning is made by Fisher in his separation theorem? What assumption does DeAngelo make in his unanimity theorem?

c) Is DeAngelo's assumption concerning completeness and/or spanning necessary for unanimity?

d) Is it likely that DeAngelo's assumption concerning completeness and/or spanning is satisfied in practice? Explain.

e) If we modify DeAngelo's assumption of no exchange costs in such a way that investors will face different borrowing and lending rates, will capital structure decisions be unanimously supported?

Reference no: EM13356969

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