What aspect does capital structure influence the most?

Capital structure significantly affects a company's financing costs and risk profile. This is because capital structure refers to the mix of debt and equity used to finance a company's operations and growth. A firm’s choice between using more debt (leverage) or more equity directly influences its cost of capital, which is the return that investors require on their investment.

When a company opts for a higher proportion of debt in its capital structure, it may lower its overall cost of capital due to interest payments being tax-deductible. However, this increases financial risk because higher debt levels can lead to greater obligations in terms of interest payments, especially during times of economic downturn or poor performance. On the other hand, relying more on equity can lead to reduced risk but may result in a higher overall cost of capital since equity investors usually seek higher returns due to the increased risk they bear.

Therefore, capital structure is crucial in determining the trade-offs between risk and return, influencing how much it costs the company to obtain funds and the associated financial risks that could impact its long-term viability and profitability.