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    Question

    According to the Net Income Approach, what happens to

    the firm’s value as debt increases?
    A It remains constant Correct Answer Incorrect Answer
    B It decreases Correct Answer Incorrect Answer
    C It increases Correct Answer Incorrect Answer
    D It fluctuates Correct Answer Incorrect Answer

    Solution

    Under the Net Income Approach, use of cheaper debt increases firm value by lowering the WACC.

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