True or False: The capital stack helps investors evaluate risk factors and cash flow probabilities.

The statement is true because the capital stack is a crucial concept in finance, particularly in real estate and commercial investments. It represents the hierarchy of different forms of financing used to fund a project, typically structured from the most senior (debt) to the most junior (equity). By analyzing the capital stack, investors can gain insights into the varying levels of risk and the associated expected cash flows.

In the capital stack, senior debt usually has the lowest risk and, therefore, the lowest expected return. As you move down the stack to mezzanine debt and then equity, the risk increases, which often corresponds to higher potential returns. Understanding this hierarchy allows investors to evaluate how different funding sources will impact cash flow and the financial health of a project. It also assists in assessing the likelihood of receiving returns based on one's position in the stack, making it an essential tool for making informed investment decisions.

This context makes it clear that the capital stack is relevant to all investors involved, regardless of whether they are equity or debt investors, as it highlights how potential risks and returns are structured across different investment types.