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Which of the following is not an assumption in the Miller & Modigliani approach?

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Which of the following is not an assumption in the Miller & Modigliani approach?
  • AThere are no transaction costs
  • BSecurities are infinitely divisible
  • CInvestors have homogeneous expectations
  • DAll the firms pay tax on their income at the same rate
Correct answer: D
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All the firms pay tax on their income at the same rate

All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment. The theory stated that the value of the firm is not dependent on the choice of capital structure or financing decisions of the firm.