Markets

Question 1

What is a Competitive Market?

1.
2.
3.

Answer 1

1. market in which goods can be bought and sold simultaneuously
2. here the price determines value of the good
3. value of good does not depend on views or preferences of decision maker (!)

Question 2

What is the Valuation Principle?

1.
2.
3.

Answer 2

• states that value of an asset to a firm or its investors is determined by its competitive market price
• here, the benefits/ costs of a decision should be evaluated using these market prices
• e.g.: PV of benefit exceeds PV of costs, this decision will increase MV of the firm!

Question 3

What is the practise of Arbitrage?

Answer 3

the practise of buying and selling equivalent goods in different markets to take advanage of a price difference without taking any risk

Question 4

Definition | Normal Market

What do you have to keep in mind?

Answer 4

• a competitive market in which there are no arbitrage opportunities
• here, evaluate NPV of investment decision seperately from decision the firm makes regarding on how to finance

Question 5

What is the Law of One Price?

Answer 5

it states that if equivalent investment opportunities trade simultaneuosly in different markets, then they mus trade for the sa,e price in both markets

Question 6

What does the Seperation Principles state?

Answer 6

• due to no arbitrage, security transactions in a normal market neither create nor destroy value on their own
• in normal markets, evaluate NPV of investment decision seperately from decision the firm makes regarding onhow to finance the investment