The net operating income approach to capital structure emphasizes the relationship between:a.Earnings before interest and taxes (EBIT) and net incomeb.Earnings before interest and taxes (EBIT) and earnings per share (EPS)c.Net operating income and net incomed.Net operating income and earnings per share (EPS)
Question
The net operating income approach to capital structure emphasizes the relationship between:a.Earnings before interest and taxes (EBIT) and net incomeb.Earnings before interest and taxes (EBIT) and earnings per share (EPS)c.Net operating income and net incomed.Net operating income and earnings per share (EPS)
Solution
The Net Operating Income (NOI) approach to capital structure emphasizes the relationship between:
a. Earnings Before Interest and Taxes (EBIT) and Net Income
This approach, proposed by Durand, suggests that the market value of a firm is not affected by the change of debt component in the capital structure of a firm. It assumes that the total market value of a firm is given and does not change with the change of leverage. The cost of equity increases with an increase in leverage to exactly offset the advantage of the cheaper debt. Therefore, the overall cost of capital remains constant irrespective of the degree of leverage. This means that the value of a firm is determined by its net operating income or EBIT.
Similar Questions
Which approach to capital structure focuses on the relationship between net income and earnings per share (EPS)?a.Net operating income approachb.Traditional approachc.Modigliani-Miller approachd.Pecking order theory approach
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
Which capital structure theory argues that there is an optimal level of debt for a firm?a.Net income approachb.Net operating income approachc.Traditional approachd.Modigliani-Miller model
EBIT is usually the same thing asa.earnings before taxb.operating profit.c.funds provided by operationsd.net income
Which of the following is NOT a capital structure theory?a.Net income approachb.Net operating income approachc.Traditional approachd.Weighted average cost of capital (WACC) approach
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