MM Hypothesis of dividend policy is based on certain assumptions. What are those assumptions without which the hypothesis cannot hold? Explain…

MM hypothesis is based on the following assumptions: Perfect capital markets: The firm operates in a market in which all investors are rational and information is freely available to all. No taxes: There are no taxes or no tax discrimination between dividend income and capital appreciation (capital gain). It means there is no difference in taxation of dividend income or capital gain. This assumption is necessary for the universal applicability of the theory, since the tax rates may be different in different countries. Fixed investment policy: It is necessary to assume that all investment should be financed through equity only, since implication after using debt as a source of finance may be difficult to understand. Further, the impact will be different in different cases. No floatation or transaction cost: Similarly, these costs may differ from country to country or market to market. Risk of uncertainty does not exist. Investors are able to forecast future prices and dividend with certainty and one discount rate is appropriate for all securities and all time periods.