Jackson Trucking Company is in the process of setting its target capital structu
ID: 2798028 • 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% $3.10 $34.25
30 3.55 36.00
40 3.70 35.5
50 3.55 34.00
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.
%
please show work
Explanation / Answer
Optimal capital structure is the ratio of debt equity when the WACC is minimized and the value of firm is maximized. In this case, the maximum stock price is when debt ratio is 30%
Hence, debt% = 30% and equity% = 70%
At this same debt ratio, WACC is also minimized.
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