OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company is in the process of setting
ID: 2791824 • Letter: O
Question
OPTIMAL CAPITAL STRUCTURE 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: Debt/Capital Ratio Projected EPS Projected Stock Price 20% 30 40 50 $3.15 3.55 3.85 3.55 $34.00 35.75 37.00 32.25 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 96 equity At what debt-to-capital ratio is the company's WACC minimized? Round your answer to two decimal places.Explanation / Answer
Optimal structure: Structure which maximizes stock price, & also where WACC is minimized. This happens at stock price of $37 at 40% debt to capital ratio and EPS of $3.85
Hence, 40% debt and 60% equity is optimal capital structure
WACC is minimzed at 40% debt to capital ratio.
This coincidentally happens also where EPS is maximized.
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