## Net Operating Income (NOI) Approach
- Also proposed by David Durand (1952).
- Capital structure decisions are IRRELEVANT — this is the exact opposite of the NI approach.
### Central Idea
The value of the firm (VF) and K₀ remain constant regardless of the debt component. VF cannot be increased or decreased by changing the proportion of debt.
### Behaviour of the Cost Components
| Component | Behaviour as debt increases |
|---|---|
| K_d | Remains constant |
| K_e | Increases |
| K₀ | Remains constant |
| VF | Remains constant |
- Throughout, K_e > K_d.
### Why K₀ Stays Constant — The Key Insight
The low-cost advantage of using more debt is exactly offset by a rise in K_e. As debt increases, equity shareholders perceive greater financial risk and demand a higher return, so K_e climbs just enough to keep the weighted K₀ unchanged.
### NI vs. NOI — Side-by-Side (effect of increasing debt)
| K_d | K_e | K₀ | VF | |
|---|---|---|---|---|
| NI | Constant | Constant | Decrease | Increase |
| NOI | Constant | Increase | Constant | Constant |
### Graphical View
K_d is flat, K₀ is flat (horizontal), and K_e slopes upward as leverage rises.