Based on the information below for Benson Corporation, what is the optimal capital structure?
A) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
B) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
C) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
D) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
E) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.

Question

Quizplus · Accepted Answer

The optimal capital structure is the mix of debt and equity that maximizes the value of the company. This is typically achieved when the cost of capital is minimized, which is the weighted average of the cost of debt and the cost of equity. Based on the given information, choice B has the highest EPS and stock price, indicating that the company is maximizing its value. Additionally, a 60% debt to 40% equity mix may be appropriate in this scenario as it allows the company to take advantage of the tax benefits of debt while not overly burdening the company with interest payments.

Based on the Information Below for Benson Corporation, What Is