Question

Distinguish between ni and noi approach in capital structure

Answer 1

Thank you for this question. Please find the answer below: 

NI=Net Income. 

NOI= Net Operating Income. 

Net Income is idea that suggests that the value of the firm would increase with the decrease in the cost of the overall capital through higher debt proportion. 

While, Net Operating Income is the idea that suggests that the value of the firm is not affected by the change in the cost of the overall capital through higher debt proportion.

Answer 2

Explanation:

Operating Income Approach The net income approach assumes that change in the degree of leverage will alter the overall cost of capital (WACC) and hence the value of the firm. Whereas the operating income approach assumes that degree of leverage of the firm is irrelevant to the cost of capital i.e. the cost of capital is always constant.