Which of the following best describes capital structure?

Capital structure refers to the specific mix of debt and equity that a company uses to finance its operations and growth. This mix is essential because it affects the company's overall risk profile, cost of capital, and potentially its market value.

The correct answer describes capital structure accurately as it entails the order of seniority and claims to assets. In a firm's capital structure, different types of financing (like equity, loans, convertible securities) have different seniority levels, which determine who gets paid first in the event of liquidation. Equity may have residual claims, meaning equity holders are paid last after all debts have been settled. Understanding this hierarchy is crucial for investors and stakeholders, as it directly influences their risk and return expectations.

The other options, while related to finance, do not capture the essence of capital structure as precisely. Risk assessment in investments relates to evaluating the potential uncertainties that could affect investment returns, which is broader than just capital structure. Return on equity focuses specifically on how effectively a company generates profit from its equity, and operational costs deal with the day-to-day expenses necessary to run a business, which do not define capital structure directly.