## Net Income (NI) Approach
- Proposed by David Durand (1952).
- Capital structure decisions are RELEVANT (this is a relevance theory).
### Central Idea
The value of the firm can be increased by reducing K₀, and K₀ can be reduced by employing a higher proportion of debt (because debt is cheaper than equity).
### Behaviour of the Cost Components
| Component | Behaviour as debt increases |
|---|---|
| K_d | Remains constant |
| K_e | Remains constant |
| K₀ | Decreases |
| VF | Increases |
- Throughout, K_e > K_d.
- Because both K_e and K_d stay constant while cheaper debt replaces costlier equity, the weighted K₀ keeps falling.
### Implication — Optimal Structure
Under NI, the firm reaches its optimum capital structure at 100% debt (theoretically), where K₀ is minimum and VF is maximum.
### Graphical View
On a graph of cost (y-axis) vs. leverage/degree of debt (x-axis): K_d and K_e are flat horizontal lines, and K₀ slopes downward toward K_d as debt rises.