Based on the information below,what is Ezzel Enterprises' optimal capital structure?
A)Debt = 40%; Equity = 60%; EPS = $2.95; Common share price = $26.50
B)Debt = 50%; Equity = 50%; EPS = $3.05; Common share price = $28.90
C)Debt = 60%; Equity = 40%; EPS = $3.18; Common share price = $31.20
D)Debt = 80%; Equity = 20%; EPS = $3.42; Common share price = $30.40

Question

Quizplus · Accepted Answer

The optimal capital structure for a firm is the one that maximizes its value and reduces its cost of capital. Ezzel Enterprises' optimal capital structure is characterized by a debt-to-equity ratio of 60:40, with debt accounting for 60% of the financing and equity accounting for 40%. This is because the firm's EPS is highest at $3.18 and the common share price is also highest at $31.20 at this capital structure. Additionally, this capital structure balance reduces the firm's cost of capital while still providing a reasonable degree of financial leverage.

Based on the Information Below,what Is Ezzel Enterprises' Optimal Capital