Your firm has the following financing outstanding.

Debt: 50,000 units of 8%, 25-year bonds at a net price of $1198.00.

Preferred Stock: 120,000 shares of 8.5%, $100 preferred stock at a net issue price of $112.

Common Stock: 2,000,000 shares of common stock with a Beta of 1.1 and a net price of $65.

Retained Earnings: $96,660,000.

Market: tax rate = 40%, MRP (market risk premium) = 9%, R_f (risk free rate) = 3.1%. Firms prefer to operate within an optimal debt range, where the average weighted cost of capital is lowest. But when firms increase the amount of debt used, participants in the market may consider that the firm has increased its risk, its probability of bankruptcy and the cost of its financing. As such, analysts have provided the following forecast. Determine the optimal debt level for this firm by calculating the capital structure with the lowest average weighted cost of capital, AWCOC. (k_d is the after tax cost of debt.) [Circle the Optimal Capital Structure]

% of Debt k_d %of Equity k of Equity WACOC

0 - 100 12%

20 3% 80 12%

30 3.2% 70 12%

40 3.5% 60 13%

50 4.5% 50 15%

60 7% 40 16%

70 9% 30 18%

90 12% 10 22%