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Unformatted text preview: onomic Review (June 1958), pp. 261–297.
15. Perfect-market assumptions include (1) no taxes, (2) no brokerage or flotation costs for securities, (3) symmetrical information—investors and managers have the same information about the firm’s investment prospects, and (4)
investor ability to borrow at the same rate as corporations. 526 PART 4 Long-Term Financial Decisions other factors—revenue stability and cost stability—also affect it. Revenue stability reflects the relative variability of the firm’s sales revenues. Firms with reasonably stable levels of demand and with products that have stable prices have stable
revenues. The result is low levels of business risk. Firms with highly volatile product demand and prices have unstable revenues that result in high levels of business
risk. Cost stability reflects the relative predictability of input prices such as those
for labor and materials. The more predictable and stable these input prices are,
the lower the business risk; the less predictable and stable they are, the higher the
Business risk varies among firms, regardless of their lines of business, and...
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