Define arbitrage process, Financial Management

Assignment Help:

Q. Define Arbitrage Process ?

The basic theory of the MM approach if we ignore the taxes is that the total value of a firm should be constant irrespective of the degree of leverage. In other words the fundamental preposition of the MM approach is that the capital structure decision is irrelevant. MM approach offers behavioural justification for the irrelevance of the capital structure decision and isn't content with merely stating the preposition. The justification slander in the arbitrage process.

Arbitrage process engages buying and selling of those securities whose prices are lower (undervalued securities) as well as selling those securities whose prices are higher (overvalued securities). Buying the undervalued securities will raise their demand and will result in raising their prices and the selling of overvalued securities will raise their supply thereby bringing down their prices. This will carry on till the equilibrium is restored. The arbitrage process guarantees that the securities of two identical firms cannot sell at different prices for long.


Related Discussions:- Define arbitrage process

Explain the significance of the term additional funds needed, Explain the s...

Explain the significance of the term additional funds needed . When the pro forma balance sheet is finished, total liabilities and total assets and equity will rarely match.

Zero-volatility spread, The zero-volatility spread is a measure of th...

The zero-volatility spread is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if a mortgage-backed or asset-backe

Manage Budget and Financial Report, Complete the financial reporting for ea...

Complete the financial reporting for each period and develop recommendations using the templates provided. Procedure 1. Read the case study. 2. Complete the financial reports

How are financial trades made in an over-the-counter market, How are financ...

How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market. In difference to the organized exchanges, which have physical locat

Financial management, using the operating cycle and any other financial man...

using the operating cycle and any other financial management knowledge,discuss the applicability of such cycle to poultry business in Uganda(consider broilers)

Accounting framework - convention of materiality, Accounting Framework - Co...

Accounting Framework - Convention of Materiality Materiality means relative significance. In other words whether a matter should be disclosed or not in the financial statement

Distinguish between a promissory note and a bill of exchange, QUESTION ...

QUESTION (a) "A promissory note is an instrument in writing (not being a blank or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certai

Characteristics of a stock exchange, Characteristics of a Stock Exchange ...

Characteristics of a Stock Exchange The requirements for a stock exchange to act as a platform for buying and selling securities is dependant upon the trading prerequisites. Som

Capital gain on investment, a. Why do prices of low coupon bonds tend to fl...

a. Why do prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds? And why do prices of longer te$ to maturity bonds tend to fluctuate more than th

Financial crisis , a)  Tonddu plc is expected to report record earnings of ...

a)  Tonddu plc is expected to report record earnings of £120m next year.  It has grown rapidly over the last few years, the growth has been achieved by maintaining a high level of

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd