Which one of the following approaches of capital structure pleads that debt financing initially increases the value of the firm; however excess debt financing beyond a particular point reduces the value of the firm?

Correct option is C

The Traditional Approach to capital structure suggests that initially, the use of debt financing increases the value of the firm due to the tax advantages of debt and the lower cost of debt compared to equity. However, beyond a certain point, excessive debt can increase financial risk and the cost of financial distress, leading to a decrease in the value of the firm.