GK
ACCOUNTING
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
M-M Approach
|
|
|
Traditional Approach
|
|
|
Net Income Approach
|
|
|
Net operating Income Approach
|
Detailed explanation-1: -The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is pronounced by Net income approach. Net Income Approach suggests that value of the firm can be increased by decreasing the overall cost of capital (WACC) through higher debt proportion.
Detailed explanation-2: -Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.
Detailed explanation-3: -According to NOI approach, there is no relationship between the cost of capital and value of the firm i.e. the value of the firm is independent of the capital structure of the firm. Assumptions: The corporate income taxes do not exist. Debt Equity mix is irrelevant for computation of market value of firm.