Many theories of corporate structure will understand debt and equity in the traditional sense. For instance, as the David Durand theory in corporate structuring shows, there can be two extreme views. Firstly, the net income approach states that the cost of debt and equity that is to be assessed is independent of the capital structuring. Such a representation is quite radical. The net operating income approach attempts to look at the same, with a different outcome. On the other hand, the cost of equity is assumed here to increase directly and linearly with average. The traditional theory is much different in that it views corporate structuring in a form of compromise of net income and net operating views.
According to the traditional view therefore, the cost of capital will decrease and increases with average. Usually, three stages of decrease and increase in the cost of capital will indicate three different leverages are observed in the traditional view. Firstly, the traditional view is criticized based on the implication that totality in risk is suffered by all security orders, while the assumption is challenged by other researchers such as Modigliani and Miller. The MM hypothesis as is named, argues that securities are usually traded under perfect marketing situations where risk classes are more homogeneously constructed.