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Capital structure is irrelevant because 2 point: The cost of capital changes as capital structure changes. Quantity of debt falls, the return demanded by the shareholder increases The market value of the firm is independent of capital structure. The capital structure cohabit with market value of the firm Market value of the firm is = 2 points Market value of equity + Market value of debt Firm value of equity + firm value of debt Dividend/Cost of Equity Interest/Cost of debt The amount of tax the firm would have paid, had it not incurred the interest * 2 points expense is known as Taxable income Tax shield Tax rebate