Net Income Approach

Net Income Approach suggested by The “Durand” the

capital structure decision is relevant to the valuation
of the firm or we can say change Leverage ratio will
lead to change in the value of the firm and overall cost
of capital.
If Rate is high( ) then Cost of capita is less( ), Value of
the firm will increase( ) and also Market price of the
share will increase( )
Assumptions

Cost of debt is lower than cost of equity.

Risk perception of investor is not changed by the use
of debt
No tax
 Diagram

Ke = Cost of Equity
Ko = Cost of overall cost of capital
Kd = Cost of debt