The firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Question

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The capital structure, which is the way a firm finances its activities through a mix of debt and equity, can impact its cost of capital, financial flexibility, and risk profile. A firm with a high level of debt in its capital structure may have lower costs of capital due to tax benefits but may also have higher financial risk and be vulnerable to economic downturns. On the other hand, a firm with a high proportion of equity may have a more conservative financial profile but also higher costs of capital. Therefore, the capital structure can have a significant impact on the firm's value by affecting its risk and return.

The Firm's Capital Structure Can Significantly Affect the Firm's Value