Q3.y. Differentiate the NI approach and the NOI approach in capital structure decisions. Answer) Net Income Approach (NI) The net income approach to the relationship between leverage cost of capital and firm value. It suggests that there is a relationship between the capital structure and the value of the firm and, therefore, the firm can influence its value by increasing or decreasing the proportion of debt in the overall financial mix. Assumptions of the NI1 approach. The firm's total capital requirements are given and remain constant.2. The cost of debt is lower than the cost of capital.3. Both the cost of debt and the cost of capital remain constant, and increasing leverage, i.e., the ever-increasing use of debt financing in the capital structure influences investors' risk perception. The figure shows that Ke and Kd are constant for all levels of leverage, i.e. for all levels of debt financing. As the proportion of debt or leverage increases, the WACC decreases because the cost of debt is lower than the cost of equity. This results in an increase in the value of the company. In the figure...