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Question 10.7: Discuss whether the assumptions made by Miller and Modiglian...

Discuss whether the assumptions made by Miller and Modigliani’s dividend irrelevance theory fail to mirror the real world. If you agree that they fail to mirror the real world, does that invalidate the usefulness of their theory?

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Here the discussion should centre on the fact that Miller and Modigliani’s assumptions are simplifications of the real world. These assumptions, while not mirroring the real world, do not totally invalidate the model. Given these assumptions, the conclusions made by the model are perfectly logical. The nature of some of the assumptions only weakens the conclusions of the model without actually invalidating the model.

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