Question
Hello - I need some help with the following question. Thank you. Problem: Optimal Capital Structure XYZ Inc. is setting its target capital structure. The
Hello - I need some help with the following question. Thank you.
Problem: Optimal Capital Structure
XYZ Inc. is setting its target capital structure. The CFO of XYZ Inc. believes that the optimal debt-to-capital ratio is between 25 percent and 60 percent. Her staff derived following the projections. Various debt levels were considered.
| Dept/Capital Ratio | Projected EPS | Projected Stock Price |
|---|---|---|
| 25% | $4.20 | $40.00 |
| 35% | $4.45 | $41.50 |
| 45% | $4.75 | $41.25 |
| 60% | $4.50 | $40.59 |
Assuming that the firm uses only debt and common equity:
1. What is XYZ's optimal capital structure?
2. At what debt-to-capital ratio is the company's WACC minimized?
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Financial Markets and Institutions
Authors: Anthony Saunders, Marcia Cornett
6th edition
9780077641849, 77861663, 77641841, 978-0077861667
