The net operating income (NOI) approach to capital structure theory focuses on the relationship between:a.Operating income and net incomeb.Operating income and earnings per share (EPS)c.Operating income and the cost of debtd.Operating income and the cost of equity
Question
The net operating income (NOI) approach to capital structure theory focuses on the relationship between:a.Operating income and net incomeb.Operating income and earnings per share (EPS)c.Operating income and the cost of debtd.Operating income and the cost of equity
Solution
The Net Operating Income (NOI) approach to capital structure theory focuses on the relationship between operating income and the cost of debt. This approach assumes that the value of a firm is not affected by its capital structure and that the cost of equity does not change with changes in the debt-equity ratio. Therefore, the focus is on how operating income can cover the cost of debt.
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