Which one of the following is constant in the Net Operating Income Approach?

Cost of Equity

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Cost of Debt

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WACC

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k_{e}

and

k_{d}

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Solution

The correct option is A WACC
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.
Net income approach is also known as fixed $K_{e}$ theory. WACC remains constant and with the increase in debt the cost of equity increases. The overall capitalization rate remain constant irrespective of the degree of leverage.

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