In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporations capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MMs algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MMs 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.

1.Investors have homogeneous expectations about earnings and risk.

2.Business risk can be measured by the standard deviation of EBIT.

3.There are no taxes, either personal or corporate.

4.All cash flows are perpetuities, so EBIT will remain constant.