Jensen and Meckling (1976) defines an agency relationship as a contract under which one or more persons hire another person (agent) to perform some service on their behalf and the principals delegate the decision-making authority to the agent. Agency relationships exist between shareholders& managers and between shareholders& bondholders. Use Jensen and Meckling (1976) and Jensen (1986) as references for below questions.

a) Explain the benefits of debt in reducing agency costs of free cash flow.

b) Explain how does agency theory lead to an optimal capital structure.