Jackson Trucking Company is in the process of setting its target capital structu
ID: 2344200 • Letter: J
Question
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%................$3.30....................................$34.75
30 ...................3.40......................................35.75
40....................3.75......................................36.25
50....................3.60......................................33.75
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
The optimal capital structure is that capital structure where WACC is minimized and stock price is maximized. Because Jackson’s stock price is maximized at a 30% debt ratio, the firm’s optimal capital structure is 30% debt and 70% equity. This is also the debt level where the firm’s WACC is minimized.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.