Which of the following assumption is of Net Income Approach of capital structure? Cost of debt is less…
David Durand's Net Income (NI) Approach assumes that the cost of debt is lower than the cost of equity (A), there are no corporate taxes (B), and the use of debt does not…
Choose your answer
Which of the following assumption is of Net Income Approach of capital structure?
- Cost of debt is less than cost of equity.
- There is no tax.
- Risk perception of investor will not change by the use of debt.
- Change in capital structure of a company does not affect market value of the firm.
- The business risk will remain constant at every level of debt and equity mix.
Answer and explanation
Correct answer C
David Durand's Net Income (NI) Approach assumes that the cost of debt is lower than the cost of equity (A), there are no corporate taxes (B), and the use of debt does not alter investors' risk perception (C). Consequently, increasing financial leverage lowers the overall cost of capital and increases firm value, making A, B, C only correct.
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UGC NET Commerce