1.I get a little confused at times when trying to understand the impact of a firm taking on more debt. In particular, I remember an old news story from The Wall Street Journal regarding the purchase of Time Warner by AT&T. The article was titled Time Warner Deal Adds to AT&T's Heavy Debt Load. Please note belowa couple of quotes from that article.

"Buying Time Warner Inc. will make AT&T Inc. among the most heavily indebted companies on earth."

"...the carrier's (AT&T's) total debt load will grow to as much as $170 billion ..."

Further, it was written that the deal could

"...make it more expensive for AT&T to borrow money..."

a.Please briefly, clearly, and logically explain to me why the deal could make it more expensive for AT&T to access capital in the debt market. Also, please talk about what might be the impact of a large increase in debt on the cost of equity. Your explanations need to explain, not simply state, that capital would be more expensive.

b.I vaguely remember something about "the WACC smile" that was displayed in the two dimensional space put forth below. As I remember, it is possible for a firm to lower its WACC while increasing D/E for some ranges of D/E. This occurs even as the firm takes on more debt which typically results in an increase of both the cost of debt and the cost of equity. Could you please briefly, but clearly, explain to me how it might be possible to have the WACC for a firm decrease even while its cost of capital in the debt and equity markets is increasing?