Terrell Trucking Company is in the process of setting its target capital structu

Question

Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that 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 Terrell's optimal capital structure? Round your answers to two decimal places.

% debt
% equity

At what debt-to-capital ratio is the company's WACC minimized? Round your answer to two decimal places.

%

Debt/Capital Ratio Projected EPS Projected Stock Price             20% $3.00         $33.25                         30 3.60         37.50                         40 3.85         36.25                         50 3.50         32.25            

Explanation / Answer

Optimal Debt to equity ratio is the one which provides highest projected stock price.
Hence Debt/Capital ratio of 30% has highest market share price of 37.50
Debt = 30% and Equity =70%

WACC is minimised at the debt striucture where projected EPS is maximum.
Maximum projected EPS = 3.85
At Debt to capital structure of 40%
Debt = 40%, Equity = 60%

Best of Luck. God Bless

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.