GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Net Income Approach
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The Traditional View
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M.M. Hypothesis
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None of the above
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Detailed explanation-1: -According to Net Operating Income Approach, the market value of the firm is not affected by its capital structure.
Detailed explanation-2: -The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value. Market value is determined by the present value of future earnings, the theorem states. The theorem has been highly influential since it was introduced in the 1950s.
Detailed explanation-3: -Diversification is not a factor determining the capital structure.
Detailed explanation-4: -1) Net Operating Income Approach (NOI): In this approach, the market value of a business is not affected by the capital structure changes and it is ascertained by capitalizing the net operating income at the overall cost of capital.
Detailed explanation-5: -All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment.