Problem 15-11 WACC and Optimal Capital Structure 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 pre-tax cost of debt under various possible capital structures would be as follows: Market Debt Market Equity Market Debt Before to-Value to-Value Ratio (ws)Ratio (D/S) Tax Cost of Debt (rd) 7.0% 8.0 10.0 12.0 15.0 to-Equity 0.0 0.2 0.4 0.6 0.8 1.0 0.8 0.6 0.4 0.2 0.00 0.25 0.67 1.50 4.00 F, perce uses the CAPM to estimate its cost o common equity rs The company estimates that the risk-free rate is 7% the market risk premium s 4% and the company's tax rate s 30% F. pierce estimates that its beta no is "unlevered" since it currently has no debt) is 1. Based on this information, what is the firm's optimal capital structure, and what would the weighted average cost of capital be at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places. DEBT EQUITY WACC which