Among other things, this imply that all producers and consumers are price takers. There is no cost to bankruptcy. Firms issue risky debt and equity, and have the same beta b risk. Allowing for proportional corporate tax eases the no-tax assumption above. Homemade leverage is a perfect substitute for corporate leverage.
Investors are risk averse individuals.
Asset returns are distributed by the normal distribution. These were the assumptions. That is, the risk that can t be diversified away. That is, revenues less variable and fixed cash expenses from operations and less deprecations. B is the market value of debt.