Midcity corporation was a producer of a broad line of men's and women's clothing. However, Midcity was not widely recognized by the public because its products almost always carried someone else's name. Almost half of Midcity's sales went to two department store chains, with the other half of sales being divided among several dozen smaller contracts. While Midcity had maintained its major sales relationships for over two decades, there were no long- term contracts. The customers could, in theory, shift to a new supplier with no obligations other than contracts calling for delivery over a period of no more than a year. This was the main reason for the firm's low sales growth and market value. The firm's performance for the previous year is summarized below: A modernization program was part of management's plan to increase the firm value. A plant modernization would allow Midcity to price aggressively and be more profitable in the highly competitive markets in which it operated. The modernization would not add significantly to capacity. To complete the modernization program, Midcity needed $10 million of new external capital. The modernization was expected to increase net operating income by 7% per year. Based on the firm's research, Midcity's equity beta was 1.25, the risk-free rate was 6%, and the expected market return was 12%. Midcity had no long-term debt outstanding With debt. the probability of default will be as follows: It was estimated that the cost of loan default would be $3 million. Midcity was in a 38 % tax bracket. What should be the optimal debt and equity mix for the $10 million