Question

Exaplain the difference between noi approach and ni approach of capital structure

Answer 1

Answer:

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

Explanation:

Net Operating Income Approach to capital structure believes that the value of a firm is not affected by the change of debt component in the capital structure. This ratio of debt in the capital structure is also known as financial leverage. ...