Which of the following is true for Net Income Approach?

Higher equity is better

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Higher debt is better

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Debt ratio is irrelevant

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None of the above

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Solution

The correct option is D Higher debt is better
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. Capital structure is the proportion of debt and equity in which a corporate finances its business. Hence, higher debt is better is the true statement for net income approach.

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