Which of the following is true for the Net Income Approach?

V_{F}

V_{E}

V_{D}

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V_{E}

V_{F}

V_{D}

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V_{D}

V_{F}

V_{E}

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V_{F}

V_{E}

V_{E}

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Solution

The correct option is A $V_{F}$ = $V_{E}$ + $V_{D}$
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. Under NI approach;
Cost of debt = Interest market value of debt,
Cost of equity = Earnings available to shareholders market value of shares outstanding
Value of the firm = Market value of the debt + Market value of the equity
$V_{F} = V_{E} + V_{D}$ .

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V_{D} = 12 V

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