Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:
1) a firm's value and its tax rate are inversely related.
2) the value of a firm rises as the interest rate on debt rises.
3) the maximum value of a firm is obtained when a firm is financed solely with debt.
4) a firm's value and its weighted average cost of capital are inversely related.
5) the value of a firm rises as both the interest rate on debt and the tax rate rise.