Optimal capital structure Jackson Trucking Company is in the process of setting
ID: 2632972 • Letter: O
Question
Optimal capital structure
Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:
Debt/Capital Ratio Projected EPS Projected Stock Price
20% $3.05 $32.00
30 3.40 36.50
40 3.90 35.75
50 3.55 33.50
Assuming that the firm uses only debt and common equity, what is Jackson's optimal capital structure? Round your answers to two decimal places.
a.
? % debt
? % equity
b. At what debt ratio is the company's WACC minimized? Round your answer to two decimal places.
? %
Explanation / Answer
The optimal capital structure is that capital structure where WACC is minimized and stock price is maximized. Because Jackson
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