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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:
Assuming that the firm uses only debt and common equity, what is Jackson's optimal capital structure? Round your answers to two decimal places.
% debt
% equity
At what debt ratio is the company's WACC minimized? Round your answer to two decimal places.
%
Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.20 $33.50 30 3.60 35.75 40 3.75 36.00 50 3.60 32.00Explanation / Answer
Answer;
Debt/Capital Ratio
Projected EPS
Projected Stock Price
P/E ratio
Price / EPS
20%
$ 3.20
$ 33.50
10.47
30
$ 3.60
$ 35.75
9.93
40
$ 3.75
$ 36.00
9.60
50
$ 3.60
$ 32.00
8.89
P/E ratio is higher incase of Debt ratio is 20%, hence it is optimal capital stricture
Debt = 20%
Equity = 80%
Debt/Capital Ratio
Projected EPS
Projected Stock Price
P/E ratio
Price / EPS
20%
$ 3.20
$ 33.50
10.47
30
$ 3.60
$ 35.75
9.93
40
$ 3.75
$ 36.00
9.60
50
$ 3.60
$ 32.00
8.89
P/E ratio is higher incase of Debt ratio is 20%, hence it is optimal capital stricture
Debt = 20%
Equity = 80%
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