The traditional theory of capital structure states that when the weighted average cost of capital (WACC) is minimized, and the market value of assets is maximized, an optimal structure of capital exists. This is achieved by utilizing a mix of both equity and debt capital.
What are the 4 theories of capital structure?
Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.
Who gave traditional approach of capital structure?
Traditional approach is also known as Net income approach but it is the simplest form. It is in between the other two theories named as Net income theory and Net operating income theory. This approach has been formulated by Ezta Solomon and Fred Weston.
What is traditional approach in finance?
Traditional Approach According to this approach, the scope of the finance function is restricted to procurement of funds by corporate enterprise to meet their financial needs. The term procurement refers to raising of funds externally as well as the inter related aspects of raising funds.
What is the traditional approach towards the valuation of a company?
The traditional approach towards the valuation of a company assumes: that the overall capitalization rate holds constant with changes in financial leverage. that there is an optimum capital structure. that total risk is not altered by changes in the capital structure.