Which of the following are assumption of Net Operating Income Approach of Capital Structure ? (A) There…
Standard analysis establishes (A), (B), (C) and (E). Durand's Net Operating Income approach assumes that there are no corporate taxes, that the cost of debt remains constant…
Choose your answer
Which of the following are assumption of Net Operating Income Approach of Capital Structure ?
(A) There is no Corporate Tax
(B) Cost of debt remain constant at all level
(C) The Business risk remain constant every level of debt and equity mix
(D) The cost of Debt is less than cost of equity
(E) Overall cost of Capital remain constant
Answer and explanation
Correct answer D
Standard analysis establishes (A), (B), (C) and (E). Durand's Net Operating Income approach assumes that there are no corporate taxes, that the cost of debt remains constant at all levels of leverage, that business risk remains constant at every debt-equity mix, and that the overall cost of capital remains constant, so the value of the firm is independent of its capital structure. Debt being cheaper than equity is not listed among its assumptions.
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