BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Traditional Theory
|
|
|
Modigliani-Miler Theory
|
|
|
Net Income Theory
|
|
|
Net Operating Theory
|
Detailed explanation-1: -Net income approach suggests that the value of the firm can be increased by decreasing the overall cost of capital (WACC) through higher debt proportion. It is also known as fixed Ke theory as it assumes cost of equity to be constant to prove the basic theory of net income approach.
Detailed explanation-2: -The theory of the net income approach suggests increasing the value of a firm by decreasing the overall cost of capital. The cost of capital in the theory is measured in terms of Weighted Average Cost of Capital (WACC).
Detailed explanation-3: -The irrelevance proposition theorem is a theory of corporate capital structure that posits financial leverage does not affect the value of a company if income tax and distress costs are not present in the business environment.
Detailed explanation-4: -Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.
Detailed explanation-5: -What Is the Modigliani-Miller Theorem (M&M)? The Modigliani-Miller theorem (M&M) states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure.