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:

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% $3.05         $33.25                         30 3.40         37.00                         40 3.75         37.50                         50 3.55         34.00            

Explanation / Answer

Debt/Capital Ratio Projected EPS Projected Stock Price 20% $ 3.05 $ 33.25 30% $ 3.40 $ 37.00 40% $ 3.75 $ 37.50 Optimal 50% $ 3.55 $ 34.00 Debt to Capital debt/debt+equity 40/100 40/60+40 Debt 40% Equity 60%

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