F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pretax rate cost of debt under various possible capital structures would be as follows:

Market Debt to Value Ratio (wd)	Market Equity to Value Ratio (wS)	Market Debt to Equity Ratio (D/S)	Before tax cost of debt (rd)
0.0	1.0	0.00	6.0%
.2	.8	.25	7.0%
.4	.6	.67	8.0%
.6	.4	1.50	9.0%
.8	.2	4.00	10.0%

F. Pierce uses the CAPM to estimate its cost of common equity, r_s, and at the time of the analysis, the risk free rate is 5%, the market risk premium is 6%, and the companys tax rate is 40%. F. Pierce estimates that its beta now (which is unlevered because it currently has no debt) is .8. Based on this information, what is the firms optimal capital structure and what would be the weighted average cost of capital at the optimal capital structure?

Given the Tax rate of 40% r_RF=5.0% b_U=.8 r_m-r_RF=6.0%