bankruptcy costs; securities are infinitely divisible.

Rational investors and managers Investors rationally choose a combination of risk and return that is most advantageous to them. Managers act in the interest of the shareholders. Homogenous expectations Investors hold uniform or identical expectations about future operating earnings. Equivalent risk classes Companies can be easily classified and grouped into equivalent risk classes on the basis of their business risk. Absence of tax It is assumed there is no tax levied by the respective governments on the companies and also in future there wont be any such tax levies on the companies. Criticisms of Modigliani and Millers proposition The financial leverage irrelevance proposition of Modigliani and Miller is valid only if perfect market assumptions underlying their analysis are fulfilled and satisfied. In the real world, however, such assumptions are not present and the markets are characterized by various imperfections Companies are liable to pay taxes on their income. (corporate taxes) In some countries investors who receive returns from their investments in companies (by way of dividend income) are subject to taxes at a personal level (personal income tax) (In India, such dividends were earlier taxed in the hands of the investors but now removed from the scope of personal income tax. However, the companies which declare dividends are required to pay dividend tax on such dividend distribution in addition to corporate tax) Agency costs exist because of the conflict of interest between managers and shareholders and between shareholders and creditors

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