Imagine you are a contestant on a popular television quiz show, Cash for Questio

Question

Imagine you are a contestant on a popular television quiz show, Cash for Questions. You are thrilled that the category is ''Capital Structure Concepts,'' because you just learned about the theory and practical consequences associated with corporate financing decisions n your business finance class. There are five questions in this category, and the host, Steven Sawbucks, will give you the answer to each question in each of the following boxes. Remember, you must phrase your response in the form of a question and select the correct answer from the dropdown list. Good Luck! Disclaimer: You won't actually receive any money f you answer the questions correctly.

Explanation / Answer

3. Net Income Approach: This approach was suggested by Durand and he was in the favour of financial leverage decision. According to him, change in financial leverage would lead to change in cost of capital. In short, if the ratio of debt in the capital structure increases, the weighted average cost of capital decreases and hence the value of the firm.

4. Modigliani and Miller Approach (MM Approach): MM theory proposed two propositions.

Because of above stated reasons, value of debt dont change the firm value. So debt percentage can be anything.

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