Interstellar Inc. is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firms debt cost at different debt levels: Weight of Debt Weight of Equity Bond Rating Before-Tax Cost of Debt 0.0 1.0 A 7.0% 0.2 0.8 BBB 8.0 0.4 0.6 BB 10.0 0.6 0.4 C 12.0 0.8 0.2 D 15.0 The company uses CAPM to estimate its cost of common equity, and estimates that the risk-free rate is 5%, the market risk premium is 6%, and its tax rate is 40%. The company estimates that if it had no debt, its unlevered beta, would be 1.2. What is the firms optimal capital structure, and what would be its WACC at the optimal capital structure?

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