Economics · Capital Structure Theories
Consider the following statements regarding the Net Operating Income (NOI) approach to capital structure: Statement 1: The Net Operating Income (NOI) approach posits that the overall capitalization rate (Ko) remains constant for all levels of leverage because the total value of the firm depends solely on its operating earnings and business risk. Statement 2: According to the Net Operating Income (NOI) approach, the cost of equity (Ke) remains constant regardless of the degree of borrowing, allowing the firm to reduce its weighted average cost of capital (WACC) by using more debt.
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Statement 1 is false, but Statement 2 is true.
- 2Statement 1 is true, but Statement 2 is false.✓
- 3Both statements are false.
- 4Both statements are true.
Correct answer
Statement 1 is true, but Statement 2 is false.
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