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 it would like to add some debt to take advantage of

the tax shield. Its investment banker has indicated that the pre$-$tax cost of debt under

various possible capital structures would be as follows:

F$.$ Pierce uses the CAPM to estimate its cost of common equity, $r_s,$ and at the time of the

analaysis the risk$-$free rate is $5\%,$ the market risk premium is $7\%,$ and the company's

tax rate is $25\%.$ F$.$ Pierce estimates that its beta now $($which is "unlevered" because it

currently has no debt$)$ is $0\mathrm{.}7.$ Based on this information, what is the firm's optimal capital

structure, and what would be the weighted average cost of capital at the optimal capital

structure? Do not round intermediate calculations. Round your answers to two decimal

places.