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

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% $3.20 $33.75
30 3.60 36.50
40 3.90 38.00
50 3.55 32.75
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

Assuming that the firm uses only debt and common equity, what is Jackson's optimal capital structure? Round your answers to two decimal places. Since, the estimated EPS is highest at $3.75, so the optimum debt equity ratio will be 40% debt and 60% equity For second question, the information is incomeplete to answer it

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