Final answer:
The capital structure of a firm refers to the mix of different securities used to finance its assets. It includes the firm's debt securities, the securities used to finance assets, and the market imperfection that managers can exploit.
Step-by-step explanation:
The capital structure of a firm refers to the mix of different securities used to finance its assets. It represents how a firm raises financial capital by choosing between borrowing from a bank, issuing bonds, or issuing stock.
Example: Company A may choose to issue bonds and borrow money from investors, while Company B may choose to issue stock and sell ownership to the public. These decisions impact the firm's control, interest payments, and level of responsibility to shareholders and a board of directors.
The correct answer is C. I, II, and III because the capital structure encompasses the firm's debt securities, securities used to finance assets, and the market imperfection that managers can exploit.