According to the following information, what is the firm's optimal capital structure? $\begin{array}{ccc}
\text { Proportion } & \text { Earnings Per } & \text { Weighted Average Cost } \
\text { of Debt } & \text { Share (EPS) } & \text { of Capital (WACC) } \
\hline 30 \% & \$ 2.50 & 13.2 \% \
40 & 3.80 & 12.7 \
50 & 4.75 & 12.4 \
60 & 5.25 & 12.8
\end{array}$
A)30%
B)40%
C)50%
D)60%
E)To determine the optimal capital structure, the market value of the stock must be known.

Question

According to the following information, what is the firm's optimal capital structure?    $\begin{array}{ccc}
\text { Proportion } & \text { Earnings Per } & \text { Weighted Average Cost } \
\text { of Debt } & \text { Share (EPS) } & \text { of Capital (WACC) } \
\hline 30 \% & \$ 2.50 & 13.2 \% \
40 & 3.80 & 12.7 \
50 & 4.75 & 12.4 \
60 & 5.25 & 12.8
\end{array}$
A)30%
B)40%
C)50%
D)60%
E)To determine the optimal capital structure, the market value of the stock must be known.

Quizplus · Accepted Answer

The optimal capital structure is the one that maximizes Earnings Per Share (EPS) while minimizing the Weighted Average Cost of Capital (WACC). In this case, at 50% debt, the firm has the highest EPS of $4.75 and a relatively low WACC of 12.4%, indicating that 50% is the optimal proportion of debt.

According to the Following Information, What Is the Firm's Optimal