Which of the following statements is a reasonable criticism of the MM and Miller models?
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Both MM and Miller assume that personal and corporate leverage are perfect substitutes. However, an individual investing in a levered firm has less loss exposure as a result of corporate limited liability than if “homemade” leverage had been used.
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Brokerage costs were assumed away by MM and Miller, making the switch from L to U costless. Even though brokerage and other transaction costs do exist, they would not impede the arbitrage process.
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MM initially assumed that corporations and investors can borrow at the risk-free rate, because most individual investors must borrow at the same rates as those paid by large corporations.
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MM and Miller assume that there are no costs associated with financial distress, and they also consider agency costs.
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