Which of the following assumptions is part of the Modigliani-Miller theorem?

The Modigliani-Miller theorem is a foundational concept in corporate finance that establishes principles regarding the capital structure of a firm. One of the core assumptions of this theorem is that there are no taxes or transaction costs. This assumption is crucial because it allows for the simplification of capital structure decisions, leading to the conclusion that in a world without these frictions, the value of a firm is unaffected by how it is financed, whether through equity or debt.

By assuming the absence of taxes and transaction costs, the theorem posits that investors can create their own leverage (personal leverage), making the overall cost of capital the same regardless of the firm's capital structure. Consequently, in a perfect market, the firm's financing decisions do not alter its overall value, underscoring the idea that the market operates efficiently and investors behave rationally.

The other options relate to different considerations in corporate finance: limited access to information can lead to market inefficiencies, default risk is a reflection of the firm's financial stability and affects costs of capital in reality, and the idea that cash flows are dependent on financing decisions contradicts the theorem’s assertion that financing decisions do not affect firm value in perfect market conditions. Thus, the assumption of no taxes or transaction costs is indeed a cornerstone of