What does capital structure affect regarding stock price?

The capital structure of a company pertains to the mix of debt and equity that it uses to finance its operations and growth. This mix is crucial because it can significantly influence the firm's cost of capital, risk profile, and therefore its overall valuation, ultimately affecting the stock price.

When a company has a well-optimized capital structure, it can enhance its earnings per share (EPS) by utilizing debt financing to amplify returns on equity. This occurs because debt can be less expensive than equity, especially when interest rates are low, allowing the company to potentially generate higher returns on investment. If the market perceives that the company can effectively manage its capital structure, it can lead to an increase in its stock price as investors become more confident in the firm's ability to generate profits.

Moreover, different capital structures can lead to varying levels of financial risk, which also affects investor sentiment and stock price. Understanding how capital structure interacts with factors like earnings per share is essential for investors when assessing a company's value. This is why the assertion that capital structure influences stock price and EPS is accurate and reflects the underlying principles of corporate finance.