The tradeoff theory of capital structure advocates that:

I. Firms with exceptionally high depreciation expenses would have the tendency to increase the percentage of debt included in the optimal capital structure of a firm.

II. Firms with low probabilities of financial distress would have the tendency to increase the percentage of debt included in the optimal capital structure of a firm.

III. Firms with very low tax rates or minimal taxable income would have the tendency to increase the percentage of debt included in the optimal capital structure of a firm.

IV. Firms would tend to have fixed optimal capital structures over time.

V. The optimal capital structure of a firm balances the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt.