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agasfer [191]
3 years ago
12

Tobang Company is in the process of setting its target capital structure. The CFO believes the optimal debt ratio is somewhere b

etween 20 and 50 percent, and her staff has compiled the following projections for EPS and the stock price at various debt levels:
Debt Ratio Projected EPS Projected Stock Price
20% $3.20 $35.00
30% $3.45 $36.50
40% $3.75 $36.25
50% $3.50 $36.00
a. Assuming that the firm uses only debt and common equity, what is Tobang's optimal capital structure?
b. At what debt-to-capital ratio is the company's WACC minimized?
Business
1 answer:
Alex787 [66]3 years ago
3 0

Answer:

The Ideal Capital structure is approximately 20% of Debt and 50% of Equity. Thus, Optimal Capital Structure of Tobang Company is 40:60.

At 40% debt ratio the company’s Weighted Average Cost of Capital (WACC) is minimized.

Explanation:

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