Capital denotes the long-term funds of the firm. Long-term funds of the firms are financed by two major components, i.e., debt capital and equity capital. Mix of long-term debt and equity maintained by the firm is called capital structure. Financial structure includes both, long-term as well as short-term sources of funds. Capital structure is the permanent financing of the company represented primarily by long-term debt and shareholders' funds but excluding all short-term credit. A company's capital structure is only a part of its financial structure. The Net Income approach has been suggested by David Durand. According to the NI approach, the firm can increase its total valuation and lower its cost of capital when it increases the degree of leverage i.e. using more and more debt in its capital structure.
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