Decrease in Value
If we decrease the amount of debentures in the total value of the firm, according to the N1 Approach, will decrease and the overall cost of capital will increase. Let us suppose that the amount of debt has been reduced by Rs 1,00,000 to Rs 1,00,000 and a fresh issue of equity shares e to retire the debentures. Assuming other facts as given in the value of the and the weighted average cost of capital are shown in Table.
Value of the Firm (Net Income Approach)
Thus, we find that the decrease in leverage has increased the overall cost of capital and has the value of firm.