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Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes the optimal debt ratio

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Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes the optimal debt 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:

Projected EPS $3.20 3.45 3.75 3.50 Debt Ratio Projected Stock Price 20% 30 40 50 $35.00 36.50 36.25 35.50

Assuming that the firm uses only debt and common equity, what is Jackson’s optimal capital structure? At what debt ratio is the company’s WACC minimized?

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Projected EPS $3.20 3.45 3.75 3.50 Debt Ratio Projected Stock Price 20% 30 40 50 $35.00 36.50 36.25 35.50

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Fundamentals of Financial Management

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Chapter # 13
Section: Problems
Problem: 2
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Question Posted: October 05, 2011 07:43:06
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