Q89
Altering the leverage ratio does not influence the market value of the firm. This is the basic premise of _______.
A.
net income approach
B.
traditional approach
C.
modern approach
D.
net operating income approach
AnswerAnswer: Option D
Solution
Answer: Option D
Solution:
Net Operating Income Approach was also suggested by Durand. This approach is of the opposite view of Net Income approach. This approach suggests that the capital structure decision of a firm is irrelevant and that any change in the leverage or debt will not result in a change in the total value of the firm as well as the market price of its shares. This approach also says that the overall cost of capital is independent of the degree of leverage.