1. Rea Vipingo Limited has a cost of equity of 10%. Currently it has 500,000 ordinary shares which are quoted at the stock Exchange at $120 per share. The companys earnings per share is $ 10 and it intends to maintain a dividend payout ratio of 50% at the end of the current financial year. The expected net income for the current year is $6 million and available investment proposals are estimated to cost $12 million.

Required:

1. Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
2. What are the assumptions inherent in the MM Model?