The use of wealth-maximization to shareholders as an operating objective for business investment and financial decisions is compatible with a whole range of goals which it may have with respect to the economic welfare of owners. To pursue the overriding goal of wealth-maximization, a financial decision-maker should strive to maximize the market value at the same time minimizing the cost of capital of a company. The theory of capital structure is, therefore, based on the valuation of a firm and the estimation of the cost of capital. So far three approaches to the valuation of the earnings of a company have been introduced: the net income approach(NI Approach), the net operating income aporoach (NOI Approach), and the traditional approach. NI and NOI approaches represent the extremes in valuating the firm with respect to the degree of leverage and the traditional approach falls somewhere between the extremes. Based on these approaches, a number of studies have dealt either directly or indirectly with the question of whether leverage affects the cost of capital and the valuation of a firm. Most of the empirical testing has involved regression studies in which either the measured average cost of capital or earnings /price ratio is used as dependent variable and either leverage or leverage plus explanatory variables are used as the independent variable. In general, the results of empirical testing of the relationship between leverage and cost of capital have been tenuous. The major difficulty is in holding constant all other factors that affect valuation. In particular future growth, as perceived by investors at the margin, is extremely hard to measure. The traditional position on leverage is frequently referred to as a U-shaped cost of capital curve, and it assumes that there is an optimal capital structure and that the firm can increase total value of the firm through the judicious use of leverage. However, Franco Modigliani and Merton Miller, in their famous 1958 article, offered a behavioral support for the independence of the total valuation and the cost of capital of the firm from its capital structure. In theory, the firm should, therefore, seek an optimal capital structure and finance future investment projects in those proportions. The optimal capial structure is one in which the marginal real cost of each available method of financing is the same. In practice, how can we apply the theory of capital structure in Korea and how does the financial manager determine tie optimal structure for his particular company? For an analysis and its application, the author has finally selected ten companies out of fifty foreign-financed corporations in relatively homogeneous risk class. In order to make sample companies more homogeneous as to financial risks, the sample has been selected by the size of paid-in capital and longterm capitalization, by the level of net profits and return on investment, and by reliability of data. Major findings of this analysis are summarized as follows: a. Average cost of debt (Ki) of sample corporations turns out to be 7.8% (before-tax basis) and 5.32%o(after-tax basis) and far below the level of cost of equity capital (Ke), 15.9% (before-tax basis) and 9.82% (after-tax basis). Interestingly enough, it is not true to say that interest rates of banking institutions may be higher than the return on investment in Korea. The combined cost of capital is 9.66% (before-tax basis) and 6.57% (after-tax basis). b. In general, the cost of debt remains constant over the relevant range of leverage, and beyond this leverage Ki rises rapidly. The cost of debt curve for sample corporations is downsloping over a certain level of leverage. This comes from the fact that money-lenders do not usually analyze the financial risk and all interest rates are determined by banking regulations without considering a company`s financial positions. It is, therefore, hard to find any correlation between financial risks or financial