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% $3.25 $33.50 30 3.65 37.00 40 3.90 36.00 50 3.65 33.25 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

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.

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