Elliott is trying to determine its optimal capital structure. The companys capital structure consists of debt and common stock. The companys investment bankers have given the following estimates for Rd.

Percent financed with debt	Bond rating	Before tax cost of debt
0.00	AAA	7.0%
0.20	AA	8.0%
0.40	A	10.0%
0.60	BBB	12.0%
0.80	BB	15.0%

Company uses CAPM to estimate its cost of equity. The risk free rate is 5% and the market risk premium is 6%. Elliott estimates that if it had no debt, its beta would be 1.2. Companys tax rate is 40% and growth rate is zero. The company estimates its free cash flow to be 30 mn.

On the basis this information, what is the companys optimal capital structure and what is the firms cost of capital at this optimal capital structure?

Guidelines:

Students are required to show all the calculations.

Calculations should be neatly categorized.

Results should be in a tabular form.

After calculation, students are required to point out the optimal capital structure and the reason for choosing this.