COMM 318 Chapter 2: Accounting Under Ideal Conditions

• School: Queen's University
• Department: Commerce
• Course: COMM 318
• Professor: Ahmed E Hassan

Document Summary

Dividend irrelevancy: with perfect market conditions, the timing of dividend payment isn"t important. Reliable: since perfect info is given, it"s impossible for management to alter any valuations since they can be perfectly derived from the info given. Arbitrage: occurs when you can make a profit simply by buying something in one market and selling it in another (without adding any value). However future cash flows and the risk-free interest rate are publicly known, so everyone would be able to calculate the same value and thus expect the same price. The state of the economy good or bad. Each state represents a different possible economic situation for the coming period(s) can be influenced by many things like nature, government policies, etc. State probabilities are objective and publicly known each person has the same set of probabilities, and these are not influenced by the outcomes of prior years. Publicly observable after the fact everyone knows.