Jay Inc. is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your search indicates that debt rating will be as follows at different debt levels:

D/D+E	Rating	Intrest Rate
0%	AAA	10%
10%	AAA	10.50%
20%	A	11%
30%	BBB	12%
40%	BB	13%
50%	B	14%
60%	CCC	16%
70%	CC	18%
80%	C	20%
90%	D	25%

The firm currently has 1 million shares outstanding at $20 per share (tax rate= 40%) Market Risk premium is 5.5%

a) What is the firms cost of Equity at different debt levels.

b) What is the firms after-tax cost of debt at different debt levels.

c) Estimate the optimal debt ratio using the cost of capital approach