The correct answer is C. There is no corporate tax though there are personal income tax.
The ModiglianiâMiller theorem, also known as the MM theorem, is a theory of capital structure that states that in a perfect market, the capital structure of a firm will not affect its value. This means that the firm’s value will be the same regardless of how much debt or equity it uses to finance its assets.
The MM theorem is based on the following assumptions:
- There are no taxes.
- There are no transaction costs.
- Investors are rational and have homogeneous expectations.
- Information is freely available to all investors.
- There are no agency costs.
If any of these assumptions are violated, then the MM theorem will not hold. In particular, if there are corporate taxes, then firms will have an incentive to use debt financing, since the interest payments on debt are tax-deductible. This is because the interest payments reduce the firm’s taxable income, which in turn reduces the firm’s tax liability.
Therefore, the answer to the question “Which of the following is not an assumption in Miller and Modigliani approach?” is C. There is no corporate tax though there are personal income tax.