What is the observed relationship between debt ratios and profitability and the perceived costs of financial distress?

Question:

What is the observed relationship between debt ratios and profitability and the perceived costs of financial distress? Why does the relationship between leverage and profitability imply that choice is residual in nature?
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...