The correct answer is: A. Traditional Approach
The traditional approach to capital structure assumes that personal leverage can replace corporate leverage. This means that shareholders can use their own personal borrowing to finance their investment in a company, and that this will have the same effect as the company borrowing money itself.
The MM model, on the other hand, argues that personal leverage and corporate leverage are not equivalent. The MM model states that the value of a company is not affected by its capital structure, and that shareholders can achieve the same level of risk and return by using their own personal borrowing to finance their investment in a company.
The net income approach to capital structure focuses on the impact of capital structure on a company’s net income. This approach argues that a company’s capital structure should be chosen in order to maximize its net income.
The net operating income approach to capital structure focuses on the impact of capital structure on a company’s net operating income. This approach argues that a company’s capital structure should be chosen in order to maximize its net operating income.
In conclusion, the traditional approach to capital structure assumes that personal leverage can replace corporate leverage. This means that shareholders can use their own personal borrowing to finance their investment in a company, and that this will have the same effect as the company borrowing money itself.