Optimal capital structure Jackson Trucking Company is in the process of setting

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% $3.10 $32.25 30 3.55 37.00 40 3.75 36.75 50 3.55 32.25 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. %

Explanation / Answer

Optimal capital structure is 0.3. It implies Debt/capital =0.3 and (D+C)=1 solving for D and C

% of debt=23.08%

% of equity=76.92%

Debt ratio= debt /assets= 23.08%

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