In case of net income approach, the cost of equity is ___________.

Constant

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Increasing

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Decreasing

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None of the above

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Solution

The correct option is A Constant
Net income approach suggests that the value of the firm can be increased by decreasing the overall cost of capital (WACC) through higher debt proportion. It is also known as fixed $K_{e}$ theory as it assumes cost of equity to be constant to prove the basic theory of net income approach.

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List-I	List-II
(a) Realised yield method	(i) Cost of equity share capital
(b) Taxation	(ii) Cost of equity capital
(c) Cost of total capital employed	(iii) Cost of debt capital
(d) Dividend growth is a consideration	(iv) Weighted cost of capital

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