Q. Describes Net Operating Income Approach to Capital Structure?
NOI (Net Operating Income Approach):- This is another speculation of capital structure which is propounded by 'Durand' and is just opposite to Net Income Approach. The real meaning of this approach is that the capital structure decision of a firm is irrelevant. Any alter in leverage will not lead to any change in total value of the firm. It signifies that the overall cost of capital would remain same whether the debt-equity mix is 50:50 or 30: 70 or 60:40. Therefore the total value of the firm the market price of shares and the overall cost of capital is independent of the degree of leverage.
Assumptions of NOI Approach:-
(i) The cost of debt is lesser than the cost of equity
(ii) There are no corporate or personal income taxes.
(iii)The business risk stays constant at every level of debt & equity.