The correct answer is: D. All the firms pay tax on their income at the same rate.
The Miller & Modigliani approach, also known as the ModiglianiâMiller theorem, is a theory of corporate finance that states that in a perfect market, the capital structure of a company (how much debt and equity it has) does not affect its value. This is because, in a perfect market, investors are able to diversify their portfolios and therefore do not need to worry about the risk of a particular company’s debt.
The assumptions of the Miller & Modigliani approach are as follows:
- There are no transaction costs.
- Securities are infinitely divisible.
- Investors have homogeneous expectations.
- There are no taxes.
The assumption that all firms pay tax on their income at the same rate is not necessary for the Miller & Modigliani approach to hold. In fact, the theorem can be extended to include taxes, as long as the tax rate is the same for all firms.
However, the assumption that all firms pay tax on their income at the same rate is not realistic. In reality, there are different tax rates for different types of businesses, and even for different types of income within a business. This means that the Miller & Modigliani approach is not a perfect model of the real world, but it is still a useful tool for understanding corporate finance.