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Capital structure refers to the mix of debt and equity a firm uses to finance its operations and growth. Theories of capital structure attempt to explain how firms decide on the proportion of debt and equity financing. The key theories include the Net Income (NI) Approach, Net Operating Income (NOI) Approach, Traditional Approach, Modigliani and Miller (MM) Theorem, and Pecking Order Theory. The Net Income (NI) Approach, developed by David Durand, suggests that increasing debt in the capital structure lowers the overall cost of capital and increases the value of the firm. According to this approach, a firm can minimize its cost of capital and maximize its value by using more debt, which is usually cheaper than equity. The Net Operating Income (NOI) Approach, also proposed by Durand, contrasts the NI Approach by asserting that the capital structure is irrelevant in determining the ____ _________ ___ ___ ______ _____ _____ _________ ________.
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