Noi Approach Of Capital Structure Formula 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
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 Net Operating Income Approach Proposed by David Durand this theory argues that capital structure decisions do not affect a firm s market value The overall cost of capital remains constant irrespective of the financing mix Assumptions include The market values the firm as a whole Business risk remains constant across debt equity
Noi Approach Of Capital Structure Formula
Noi Approach Of Capital Structure Formula
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2 Net Operating Income Approach NOI Approach This theory is just opposite to NI approach NI approach is relevant to capital structure decision It means decision of debt equity mix does affect the WACC and value of the firm As per NOI approach the capital structure decision is irrelevant and the degree of financial leverage does not affect 5 Net Operating Income Approach NOI According to this approach capital structure decisions of the firm are irrelevant Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares as the overall cost of capital is independent of the degree of leverage As per NOI Approach
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 Explain Net operating income theory of capital structure Capital structure of a company depends on mix or ratio of debt and equity in their mode of their financing Depending on what company prefer some may have more debt or more equity in financing their asset but final goal is to maximize their market value and their profits Net operating income NOI
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Based on the ratio of finance WACC and Value of a firm are affected There are four capital structure theories net income net operating income and traditional and M M approaches Capital Structure Capital structure is the proportion of all types of capital viz equity debt preference etc According to Net Operating Income Approach which is just opposite to NI approach the overall cost of capital and value of firm are independent of capital structure decision and change in degree of financial leverage does not bring about any change in value of firm and cost of capital The Net approach suggest that the market value of the firm
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