Which of the following statements about capital structure is true according to traditional corporate finance principles?

The correct statement is that capital structure can influence a firm's overall cost of capital. This is a fundamental concept in corporate finance that indicates how a company's mix of debt and equity financing impacts its weighted average cost of capital (WACC).

When a firm utilizes debt in its capital structure, it typically benefits from a lower cost of capital due to the tax shield provided by interest payments, as they are tax-deductible. However, increasing leverage can also lead to higher risks of insolvency and higher costs of equity as investors demand a higher return for the increased risk. Therefore, there is a balancing act where a firm's capital structure can diminish its overall cost of capital up to a certain level of debt, but eventually may increase it as the risks escalate.

This dynamic highlights that firms need to carefully consider their financing decisions and the implications those decisions have on their overall cost of capital. It suggests a relationship where the optimal capital structure enhances value and minimizes the cost of capital, justifying the statement that capital structure can influence a firm's overall cost of capital.

The other statements do not hold under typical corporate finance principles. For example, higher leverage does not necessarily lead to higher valuations because excessive debt can increase financial distress. Additionally, there is no single optimal capital structure