Q254
Which of the following approaches advocates that the costs of equity capital and debt capital remain unaltered when the degree of leverage varies?
A.
Net Income Approach
AnswerB.
Traditional Approach
C.
Modigliani-Miller Approach
D.
Net operating Income
Answer: Option A
Solution
Answer: Option A
Solution:
Net Income Approach advocates that the costs of equity capital and debt capital remain unaltered when the degree of leverage varies. Net Income Approach suggests that value of the firm can be increased by decreasing the overall cost of capital (WACC) through higher debt proportion.