TRADITIONAL APPROACH TO CAPITAL STRUCTURE

It is also known as an intermediate approach. It is midway between Net Income Approach and Net Operating Income Approach.

This approach resembles the Net Income Approach in arguing that capital structure and cost of capital affect the value of the firm but it discards the view that value of company will necessarily increase for all the degrees of debt-equity mix.

Similarly, this approach maintains with the NOI that beyond a certain point of change in proportion of debt, the overall cost of capital increases leading to decrease in the value of company. But it differs from NOI that Weighted average cost of capital remains same for all degrees of debt—equity mix.