NOI approach advocates that The degree of debt financing is a. relevant b. may be relevant c. irrelevant d. may be irrelevant
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The correct answer should be the option C - Irrelevant.
According to the Net Operating Income approach, the capital structure decision of an organization or the firm is irrelevant. Any change in the leverage or in the debt will not change the total value of the firm and also the market price of its shares will remain unaffected.
According to the Net Operating Income approach, the capital structure decision of an organization or the firm is irrelevant. Any change in the leverage or in the debt will not change the total value of the firm and also the market price of its shares will remain unaffected.
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NOI approach advocates that the degree of debt financing is irrelevant.
Option: (c)
Explanation:
- According to the NOI approach, the total value of a company is independent of the capital structure decision or financial leverage of a company.
- It states that at different degrees of debt the total capitalization rate would remain constant.
- The approach states that the market value is dependent on the operating income and the other forms of the business risk of the firm.
- When there is an increase in the cost of equity with every increase in debt then the weighted average cost of capital remains constant.
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