According to the Net Income (NI) Approach:
AIncrease in debt reduces WACC and increases firm value
BCapital structure is irrelevant
CDebt has no effect on WACC
DEquity is always cheaper than debt
Answer & Solution
Correct answer: A. Increase in debt reduces WACC and increases firm value
1. NI Approach: Ke and Kd are constant, debt is cheaper than equity.
2. Higher leverage → lower WACC → higher firm value.
3. Theory suggests maximum debt to minimise WACC.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §2.1_