Lomholt Manufacturing Limited is a small listed company which has a strategy of maintaining a $1 million book-value capital structure. Lomholt Manufacturing Limited currently earns $250,000 per year before corporate taxes of 50%, has an all-equity capital structure of 100,000 shares and distributes all of its earnings as dividends. The company is considering issuing debt and using the proceeds to repurchase shares. The company is able to repurchase shares at the current price of $10 per share. The Chief Financial Officer (CFO) of the company has provided the following estimates for the cost of debt and resulting share price for the companys equity at various potential debt levels:

Amount of Debt	Debt-to-Total Assets Ratio	Average Pre-tax Cost of Debt	Resulting Share Price
$0	0.00	-	$10.00
$200,000	0.20	10.00%	$10.50
$400,000	0.40	11.00%	$11.00
$600,000	0.60	14.00%	$9.50

Provide answers to the following questions:

1. By observation, what do you think is the firms optimal capital structure? Why?
2. Determine the after-tax cost of debt (R_D), the after-tax cost of equity (R_S) and the weighted average cost of capital (WACC) at each potential leverage position for the firm. Construct a graph which relates the computed after-tax capital costs to the respective leverage (debt-to-total asset) ratios.

Do the figures and/or the graph from question 2) confirm your answer provided in question 1)?