Final answer:
The optimal capital structure in a tax world without financial distress consists of a mix of debt and equity that minimizes the Weighted Average Cost of Capital (WACC).
Step-by-step explanation:
In a world with taxes but without financial distress, the optimal capital structure consists of a mix of debt and equity that minimizes the Weighted Average Cost of Capital (WACC). This is because debt financing can be less expensive due to the tax shield on interest payments, which can lower the overall cost of capital for the company. However, an all-debt or all-equity capital structure is typically not optimal. Too much debt can lead to financial risk, and too much equity can be more expensive as equity investors require a higher rate of return. The goal is to find the right balance that minimizes the WACC and thus maximizes the value of the firm.