Net Operating Income Approach
Net Operating Income theory is called irrelevant theory since it assumes that the only capital structure change cannot affect the cost of capital and value of the firm. According to this theory irrespective of capital structure overall cost of capital will be constant, so total value of firm also remains unaffected when capital structure is changed.
As the leverage ratio is increased firm becomes more risker and leads to linear increment of cost of equity but overall cost of capital remains constant.