1. For almost all companies, there exists an optimal capital structure. This is because of which of these reasons?

I. Because debt is always cheaper than equity, debt always lowers overall costs of capital.

II. Too much debt can cause the firm to take on too much fixed costs which leaves it vulnerable to a downturn, but too little debt results in a high cost of capital.

III. There is a tax shield benefit to increased leverage.

IV. Debt is easier to raise and creates better financial flexibility.

1. All of the above are reasons.
2. Only I and II.
3. Only III and IV.
4. Only II, III, and IV
5. Only I, II and III