Modgliani and Miller's mathematical model included a number of restrictions on the behavior of firms and individuals that made the model not very realistic. Those restrictions included:
A)The assumption that there are no income taxes.
B)The assumption that securities trade in perfectly efficient capital markets in which there are no transactions costs.
C)The assumption that investors and firms can borrow as much as they want at the same rate.
D)All of the above
E)A & B only
F)B & C only

Question

Modgliani and Miller's mathematical model included a number of restrictions on the behavior of firms and individuals that made the model not very realistic.   Those restrictions included: ​ 
A)The assumption that there are no income taxes. ​
B)The assumption that securities trade in perfectly efficient capital markets in which there are no transactions costs. ​
C)The assumption that investors and firms can borrow as much as they want at the same rate. ​
D)All of the above​
E)A & B only​
F)B & C only​

Quizplus · Accepted Answer

Modigliani and Miller's model assumed that there were no income taxes (A), that securities traded in perfectly efficient capital markets with no transactions costs (B), and that investors and firms could borrow as much as they wanted at the same rate (C). These assumptions made the model simpler and easier to work with mathematically, but they also made it less realistic.

Modgliani and Miller's Mathematical Model Included a Number of Restrictions