Question

4. What are the assumptions and implication of NOI approach? Is there an optimal capital
structure as per NOI approach?
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Answer 1

Answer:

Assumptions / Features of Net Operating Income Approach:

Value of equity is the difference between total firm value less value of debt i.e. Value of Equity = Total Value of the Firm – Value of Debt. WACC (Weightage Average Cost of Capital) remains constant; and with the increase in debt, the cost of equity increases.

Explanation:

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