Which of the following best describes the optimal capital structure?

The optimal capital structure is best described as the mix that minimizes the cost of capital because it represents the most efficient way of financing a company's operations and growth while maximizing value for shareholders. A well-optimized capital structure will balance the costs and benefits of debt and equity financing, allowing a company to minimize its overall weighted average cost of capital (WACC).

Minimizing the cost of capital is crucial for enhancing a firm's valuation and ensuring that its investment projects yield returns above this cost, thereby creating value. A lower cost of capital allows the firm to undertake more investment opportunities that can lead to growth and improved financial performance.

While heavy reliance on debt might provide a tax shield due to interest expense deductibility, excessive debt increases financial risk, potentially leading to higher costs of capital due to a perceived increase in default risk. Similarly, equal parts debt and equity does not necessarily ensure the lowest cost of capital, as the optimal ratio can differ greatly among firms and industries based on their unique risk profiles and market conditions. Relying solely on retained earnings can limit growth opportunities and may not always lead to the most optimized capital structure.