1.

Explain The Assumptions Of Net Operating Income Approach (noi) Theory Of Capital Structure?

Answer»

ASSUMPTIONS of Net Operating Income (NOI) Theory of Capital Structure According to NOI approach, there is no relationship between the cost of capital and value of the firm i.e. the value of the firm is independent of the capital structure of the firm.

Assumptions:

  • The corporate income taxes do not exist.
  • The MARKET capitalizes the value of the firm as whole. Thus the SPLIT between debt and equity is not important.
  • The increase in proportion of debt in capital structure leads to change in risk perception of the shareholders.
  • The OVERALL cost of capital (Ko) remains constant for all degrees of debt equity MIX.

Assumptions of Net Operating Income (NOI) Theory of Capital Structure According to NOI approach, there is no relationship between the cost of capital and value of the firm i.e. the value of the firm is independent of the capital structure of the firm.

Assumptions:


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