Why is capital structure Important? 1)Leverage: higher financial leverage means higher returns to stockholders but higher risk due to interest payments. 2)Cost of Capital: Each source of financing has a different cost. Capital structure affects the cost of capital 3)The Optimal Capital Structure is the one that minimizes the firms cost of capital and maximizes firm value.Why is Capital Structure Important? • 1) Leverage: higher financial leverage means higher returns to stockholders, but higher risk due to interest payments. • 2) Cost of Capital: Each source of financing has a different cost. Capital structure affects the cost of capital. • 3) The Optimal Capital Structure is the one that minimizes the firm’s cost of capital and maximizes firm value