Question

. In perfect capital markets, the capital structure decision is: important because it affects the cash flows to shareholders. important because debt and equity are taxed differently. irrelevant because the decision has no effect on cash flows. important sometimes.

Answer 1

In perfect capital markets, the capital structure decision is irrelevant because the decision has no effect on cash flows. Here, investors can borrow or lend on their own, and still have the same outcome. In a perfect capital market, its capital structure does not affect the total value of the company. Instead, it is affected by the market value of total cash flows from a company's assets.