{"id":57011,"date":"2024-04-16T00:54:39","date_gmt":"2024-04-16T00:54:39","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=57011"},"modified":"2024-04-16T00:54:39","modified_gmt":"2024-04-16T00:54:39","slug":"under-which-of-the-following-approaches-cost-of-equity-capital-is-assumed-to-be-constant-with-the-change-in-leverage","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/under-which-of-the-following-approaches-cost-of-equity-capital-is-assumed-to-be-constant-with-the-change-in-leverage\/","title":{"rendered":"Under which of the following approaches cost of equity capital is assumed to be constant with the change in leverage?"},"content":{"rendered":"

[amp_mcq option1=”Net income approach” option2=”Modigliani and Miller approach” option3=”Net operating income approach” option4=”Traditional approach” correct=”option1″]<\/p>\n

The correct answer is: A. Net income approach<\/strong><\/p>\n

The net income approach assumes that the cost of equity capital is constant with the change in leverage. This is because the net income approach does not take into account the tax shield benefits of debt financing. As a result, the cost of equity capital is assumed to be the same regardless of the level of debt financing.<\/p>\n

The Modigliani and Miller approach, on the other hand, assumes that the cost of equity capital is not constant with the change in leverage. This is because the Modigliani and Miller approach takes into account the tax shield benefits of debt financing. As a result, the cost of equity capital is assumed to be lower when there is more debt financing.<\/p>\n

The net operating income approach assumes that the cost of equity capital is equal to the return on assets. This is because the net operating income approach does not take into account the tax shield benefits of debt financing. As a result, the cost of equity capital is assumed to be the same regardless of the level of debt financing.<\/p>\n

The traditional approach assumes that the cost of equity capital is equal to the risk-free rate plus a risk premium. This is because the traditional approach takes into account the risk of the investment. As a result, the cost of equity capital is assumed to be higher for riskier investments.<\/p>\n","protected":false},"excerpt":{"rendered":"

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