What is usual approach of capital structure, Financial Management

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Q. What is usual Approach of capital Structure?

Ans. Traditional Approach: - The traditional approach establishes middle among the Net Income approach and the Net Operating Income Approach. It look like Net Income approach in arguing that overall cost of capital and the value of the firm are both affected by capital structure decision. But it doesn't subscribe to the view of NI approach that use of debt in capital structure to any extent will necessarily reduce the overall cost of capital and increase the value of the firm. It looks like Net Operating Income approach that beyond a certain degree of leverage the cost of equity increases. However it differs from the NOI approach that overall cost of capital and the value of the firm are constant for all degrees of leverage.


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