The Net Operating Income approach is a capital structure theory that suggests the total value of a firm is independent of the firm's capital structure or use of financial leverage. According to this approach, the market value of a firm depends only on the firm's operating income and business risk, not on financial leverage. While financial leverage can impact distributions to debt holders and equity holders, it cannot impact the firm's operating income or total value. The Net Operating Income is a measure of real estate profitability calculated by subtracting operating expenses from revenues to examine underlying cash flows before taxes and financing costs.

1. NetoperatingINCOMEapproach
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2. In Financial Management, Capital Structure Theory Refers To A Systematic
Approach To Financing Business Activities Through A Combination Of
Equities And Liabilities. There Are Several Competing Capital Structure
Theories, Each Of Which Explores The Relationship Between Debt
Financing, Equity Financing, And The Market Value Of The Firm Slightly
Differently.
Capital structure theory:

3. Theories
Theses Theories Are To Be Understood As Relevant Theories And Irrelevant Theories
There Are 4 Theories:
 N I approach( Net income )
 N O I approach( Net operating )
 Traditional approach
 M-M approach( Modigliani and Miller )

4. This Approach Was Totally Differs From The Net Income Approach. Also Famous As
Traditional Approach, Net Operating Income Approach Suggests That Change In Debt Of
The Firm or Company Or The Change In Leverage Fails To Affect The
Total Value Of The Firm or Company. As Per This Approach, The WACC
And The Total Value Of A Company Are Independent Of The Capital
Structure Decision Or Financial Leverage Of A Company.
As Per This Approach, The Market Value Is Dependent On The Operating Income And The
Associated Business Risk Of The Firm. Both These Factors Cannot Be Impacted By The
Financial Leverage. Financial Leverage Can Only Impact The Share Of Income Earned By
Debt Holders And Equity Holders But Cannot Impact The Operating Incomes Of The Firm.
Therefore, Change In Debt To Equity Ratio Cannot Make Any Change In The Value Of The
Firm.
Net operating income approach

5. ASSUMPTIONS / FEATURES OF NET OPERATING INCOME APPROACH:
 The Overall Capitalization Rate Remains Constant Irrespective Of The Degree Of
Leverage. At A Given Level Of EBIT, The Value Of The Firm Would Be
“EBIT/Overall Capitalization Rate”
Value Of Equity Is The Difference Between Total Firm Value Less Value Of Debt
I.E. Value Of Equity = Total Value Of The Firm – Value Of Debt
WACC (Weightage Average Cost Of Capital) Remains Constant; And With The
Increase In Debt, The Cost Of Equity Increases. An Increase In Debt In The Capital
Structure Results In Increased Risk For Shareholders. As A Compensation Of Investing
In The Highly Leveraged Company, The Shareholders Expect Higher Return Resulting
In Higher Cost Of Equity Capital.

6. Net Operating Income Is A Measure Of The Profitability Of A Real Estate Investment. It Is
Used To Examine The Underlying Cash Flows Of An Investment Before The Effects Of Taxes
And Financing Costs Are Considered. A Net Operating Income Analysis Is Developed By
Prospective Investors As Part Of Their Formulation Of The Value To Place On A Property. The
Calculation Of Net Operating Income Is To Subtract All Operating Expenses From The
Revenues Generated By A Specific Property. The Formula Is:
Revenue Generated –Operating Expenses= Net Operating Income
How to calculate net operating income

7. The Revenues Associated With Real Estate Include The Following:
 Facility Rental
 Vending Proceeds
 Laundry Proceeds
 Parking Fees
 Service Charges

8. Operating Expenses Associated With Real Estate Include The Following:
 Janitorial Expenses
 Property Insurance
 Property Management Fees
 Property Taxes
 Repairs And Maintenance
 Utilities

9. conclusion
Expenses Not Included In The Operating Expenses Category Include Income
Taxes And Interest Expense.
 Capital Expenditures Are Not Included In The Formulation Of Operating
Expenses.
Though The Net Operating Income Concept Is Most Commonly Applied To
Real Estate, It Can Be Used Anywhere, Usually Under The Alternative Name Of
Earnings Before Interest And Taxes (EBIT).