NET OPERATING INCOME (NOI) APPROACH
The critical assumptions of this approach are:
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The market capitalizes the value of the firm as a whole.
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Ko depends on the business risk. If the business risk is assumed to remain constant, then Ko will also remain constant.
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The use of less costly debt increases the risk of the shareholders. This causes Ke to increase and thus offset the advantage of cheaper debt.
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Kd is assumed to be constant.
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Corporate income taxes are ignored.