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Assumptions

The MM hypothesis of irrelevance of dividends is based on the following assumptions:

1. Perfect capital markets in which all investors are rational information is available to of cost, there are no transactions costs, securities are infinitely divisible, no investor enough to influence the market price of securities, there are no notation costs.

2. There are no taxes. Alternatively, there are no differences in tax rates applicable to gains and dividends.

3. A firm has a given investment policy which does not change. The operational implication for this assumption is that financing of new investments out of retained earnings will not the business risk complexion of the firm and therefore, there would be no change required rate of return.

4. There is a perfect certainty by every investor as to future investments and profits of In other words. investors are able to forecast future prices and dividends with certain assumption is dropped by MM later.

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