Jackson Trucking 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 20% 30% 40% 50%
Projected EPS $3.20 $3.45 $3.75 $3.50
Projected Stock Price $35.00 $36.50 $36.25 $35.50
Assuming that the firm uses only debt and common equity, what is Jackson’s optimal capital structure? At what debt ratio is the company’s WACC minimized?