GENERAL KNOWLEDGE

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GK

ACCOUNTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
The cost of capital declines when the degree of financial leverage increases ‘who advocated it’.
A
Net income approach
B
Traditional Approach
C
Modigliani - Miller approach
D
Net operating income approach
Explanation: 

Detailed explanation-1: -David Durand propounded the Net Income (NI) Approach of capital structure in 1952. According to this approach, a firm can minimise the weighted average cost of capital and increase the value of the firm as well as the market price of equity shares by using debt financing to the maximum possible extent.

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 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.

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