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In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporation's capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MM's algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MM's first study were changed by MM and other researchers as the theory of capital structure evolved. Which of the following statements are assumptions that MM used in their initial model and research paper? Check all that apply. Personal taxes offset the benefits derived by corporate taxes. Information is readily available to all investors and is costless to all market participants. There are a sufficient number of buyers and sellers in the financial market that no single investor can influence security prices Cash flows grow at an unpredictable rate. Stocks and bonds are traded in "perfect markets" where there are no transaction (or brokerage) costs and all investors can borrow and lend at the same rate of interest. The cost of debt increases with the level of debt. Arbitrage is the underlying assumption necessary for MM to prove their propositions. Consider the following statement about a firm's capital structure: The value of the firm is independent of its leverage. Is the preceding statement consistent with the conclusions of Modigliani and Miller's capital structure theory? Yes

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