We examine the optimal capital structure and priority structure of multiple classes of debt using a dynamic model where firms face a tradeoff between bankruptcy costs, interest tax shield benefits, and investment benefits. As a base case, we first analyze jointly optimal policies for a firm initially constrained to a single class of debt, which results in underinvestment in the growth option. Surprisingly, this standard case produces several novel predictions, such as, financial leverage ratios need not be inversely related to a firm's investment opportunities, and reliance on credit spreads to gauge agency costs of debt is inappropriate when it is hard to identify whether debt policy is endogenous or not. Relaxing the firm's constraint, we then study jointly optimal policies for initial debt and additional debt used to finance the growth option. Ironically, equityholders' optimal strategy in this unconstrained case results in overinvestment in the growth option. As a result, we obtain an interior optimum for priority structure as an important financial contracting device. One of the paper's key implications is that priority structure plays a critical and heretofore unrecognized role in helping to resolve bondholder-shareholder conflicts over investment policy. This financial contracting perspective offers other potentially fruitful insights to better understand the effects of optimal capital structure and debt structure on corporate investment policy.