The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is pronounced by __________.

Solution (By Examveda Team)

The correct answer is (B) Net operating income approach.
Let's break down why:

* Capitalization Rate: This is essentially the overall return a company needs to satisfy its investors.
* Cost of Debt: This is the interest rate a company pays on its borrowings.
* Leverage: This refers to how much debt a company uses to finance its operations.

Now, let's look at the approaches:

* (A) Traditional Approach: This approach suggests that the cost of capital initially decreases with leverage but eventually increases as debt becomes too high risk. So, it doesn't assume a constant capitalization rate.
* (B) Net Operating Income (NOI) Approach: This approach assumes that the overall cost of capital (capitalization rate) and the cost of debt are constant, regardless of how much debt a company uses. It believes the value of the firm is determined by its operating income and not by its financing decisions. This matches the question's statement.
* (C) Net Income Approach: This is an older, less realistic approach. It implies that the cost of equity is constant, which isn't generally true in real-world scenarios.
* (D) MM Approach (Modigliani-Miller): This approach, in its initial form (without taxes), states that the value of a firm is independent of its capital structure. The version without taxes implies the cost of capital is constant. Later models with taxes modify this, but fundamentally, the NOI approach aligns more directly with the question's constant assumption.

Therefore, the Net Operating Income (NOI) approach is the best fit because it explicitly states and assumes that the overall capitalization rate and cost of debt remain constant despite changes in leverage.