Problem 13-2 Optimal capital structure Jackson Trucking Company is in the proces

Question

Problem 13-2
Optimal capital structure

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:

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.

%

Debt/Capital Ratio Projected EPS Projected Stock Price             20% $3.20         $35.00                         30 3.40         36.50                         40 3.85         36.75                         50 3.65         32.50            

Explanation / Answer

Optimal capital strucutre is where stock price is maximized and WACC is minimized
This occurs at Debt/Capital ratio of 40%
This is the ratio where WACC is mimimized

So, Optimal capital structure is 40% debt and 60% equity
WACC is mimized at 40% debt

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