Describe Traditional approach of capital structure

Question

Briefly describe Traditional approach of capital structure?

Answer 1

Traditional approach is also termed as Net income approach however it is the easiest form. It is in between the further two theories termed as Net income theory as well as Net operating income theory. This approach has been formed by Ezta Solomon and Fred Weston. This theory provides the right and correct combination of debt and equity shares and forever lead to improved market value of the firm. This approach informs about the financial risk that will be undertaken by the equity shareholders. This approach points to mainly on raising the cost of equity capital that will be done after a level of debt in the capital structure.