Net Operating Income Approach Of Capital Structure Is Propounded By This article throws light upon the top four theories of capital structure The theories are 1 Net Income Approach 2 Net Operating Income Approach 3 Traditional Approach 4 Modigliani Miller Approach Theory 1 Net Income NI Approach David Durand suggested the two famous capital structure theories viz Net Income Approach and the Operating Income Approach According to NI approach a
Net Operating Income Approach The net operating income approach suggested by David Durand states the irrelevance of capital structure in calculating the firm s value The cost of capital for the firm will always be the same No matter what the degree of leverage is the firm s total value will remain constant As observed in the case of the Net Income Approach with an increase in debt proportion the total market value of the company increases and the cost of capital decreases The reason for this conclusion is the assumption of the NI approach that irrespective of debt financing in capital structure the cost of equity will remain the same
Net Operating Income Approach Of Capital Structure Is Propounded By
Net Operating Income Approach Of Capital Structure Is Propounded By
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3 The Traditional Approach The traditional approach also known as intermediate approach is a compromise between the two extremes f net income approach and net operating income approach According to this theory the value of the firm can be increase initially or the cost of capital can be decreased by using more debt as the debt is a cheaper source funds than equity Various theories of capital structure have been propounded to explain the relationship between market value of the firm and its capital structure decision There is unanimity in the The next theory is Net Operating Income NOI Approach This theory was also developed by David Durand Pandey 2005 He probably realized the shortcomings of NI
We discussed Net Income Approach and Net Operating Income Approach of Capital Structure in the earlier session In this session we are going to discuss the Traditional Approach and Modigliani Miller Approach of capital Structure The traditional approach was propounded by Ezra Soloman in 1963 Pandey 2005 This part introduces the Net Operating Income Approach which suggests that the cost of capital and the firm value remain unaffected by changes in capital structure It covers the theoretical underpinnings assumptions and implications of this approach contrasting it with the Net Income Approach
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Net income approach and net operating income approach were proposed by David Durand According to NI approach there exists positive relationship between capital structure and valuation of firm and change in the pattern of capitalisation brings about corresponding change in the overall cost of capital and total value of the firm Thus with an increase The Net Operating Income is an important ingredient in several ratios which include the Capitalization Rate Net Income Multiplier and the Debt Service Coverage Ratio According to net operating income approach in the capital structure the overall capitalization rate and the cost of debt remain constant for all degrees of financial leverage
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Net Operating Income Approach Of Capital Structure Is Propounded By - We discussed Net Income Approach and Net Operating Income Approach of Capital Structure in the earlier session In this session we are going to discuss the Traditional Approach and Modigliani Miller Approach of capital Structure The traditional approach was propounded by Ezra Soloman in 1963 Pandey 2005