General Studies · Financial Management
According to the Net Income (NI) Approach of capital structure, how does the use of leverage affect the overall cost of capital (K o ) and the value of the firm?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The overall cost of capital is independent of the debt-equity ratio.
- 2The overall cost of capital decreases as leverage increases.✓
- 3The overall cost of capital increases as leverage increases.
- 4The overall cost of capital remains constant as leverage increases.
Correct answer
The overall cost of capital decreases as leverage increases.
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