LCG Distribution Company is in the process of setting its target capital structure. The CFO believes that the optimal debt ratio is somewherebetween 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:Debt Ratio Projected EPS Projected Stock Price20% P3.20 P35.0030% 3.45 36.5040% 3.75 36.2550% 3.50 35.50Assuming that the firm uses only debt and common equity,1. What is LCG’s optimal capital structure? ___________ 2. What debt ratio is the company’s WACC minimized? ___________
LCG Distribution Company is in the process of setting its target capital structure. The CFO believes that the optimal debt ratio is somewherebetween 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:Debt Ratio Projected EPS Projected Stock Price20% P3.20 P35.0030% 3.45 36.5040% 3.75 36.2550% 3.50 35.50Assuming that the firm uses only debt and common equity,1. What is LCG’s optimal capital structure? ___________ 2. What debt ratio is the company’s WACC minimized? ___________
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 5P
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LCG Distribution Company is in the process of setting its target capital structure. The CFO believes that 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:
Debt Ratio Projected EPS Projected Stock Price
20% P3.20 P35.00
30% 3.45 36.50
40% 3.75 36.25
50% 3.50 35.50
Assuming that the firm uses only debt and common equity,
1. What is LCG’s optimal capital structure? ___________
2. What debt ratio is the company’s WACC minimized? ___________
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