1. Bell System is trying to determine its optimal capital structure, which now consists of only debt and common equity. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firms debt cost at different levels:

Debt-to-Assets (D/A) Ratio	Bond Rating	Before Tax Cost of Debt
0.0	A	7.0%
0.2	BBB	9.0%
0.4	BB	11.0%
0.6	C	14.0%

Bell System uses the CAPM to estimate its cost of common equity and estimates the risk-free rate is 8%, the market rate of return is 15% and its tax rate is 40%. Bell System estimates that if it had no debt, its unlevered beta would be 1.4. Estimate the firms optimal capital structure, and identify the WACC at the optimal capital structure.