Determining the optimal capital structure

Review the following situation:

Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis.

Debt Ratio (%)	Equity Ratio (%)	EPS ($)	DPS ($)	Stock Price ($)
30	70	1.25	0.55	36.25
40	60	1.40	0.60	37.75
50	50	1.60	0.65	39.50
60	40	1.85	0.75	38.75
70	30	1.75	0.70	38.25

Which capital structure shown in the preceding table is Transworld Consortium Corp.s optimal capital structure?

Debt ratio = 40%; equity ratio = 60%

Debt ratio = 70%; equity ratio = 30%

Debt ratio = 60%; equity ratio = 40%

Debt ratio = 50%; equity ratio = 50%

Debt ratio = 30%; equity ratio = 70%

The optimal capital structure is the one that the WACC and the firms stock price. Higher debt levels the firms risk. Consequently, higher levels of debt cause the firms cost of equity to .