we demonstrated that the use of financial leverage typically in creases stockholders' expected returns, but, at the same time, it increases their risk.The question managers face, then, is this: Is the increase in expected return sufficient to compensate stockholders for the increase in risk? To help answer this question,it is useful to examine capital structure theory.Although theory does not provide all of the answers,it does provide insights into the effects of debt versus equity financing. Thus,firms' optimal capital structure.