We examine the optimal capital structure of a firm with stochastic revenues, stochastic variable costs, and fixed costs. In this two-state variable setting with stochastic operating leverage, we establish an Early Default Premium (EDP) formula for the value of equity and derive an integral equation for the endogenous default boundary, a function of variable costs. The value of debt, the endogenous coupon, the optimal leverage ratio and the credit spread are solved for. The impact of taxes, fixed costs and bankruptcy costs is assessed, and dynamic properties are examined.