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Optimal capital structure Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes the optimal debt-to-capital 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/Capital Ratio Projected EPS Projected Stock Price
20% $3.20 $35.00
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, what is Jackson's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized?
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What methods of cost estimation rely primarily on historical data? Describe the problems an unwary user may encounter with the use of historical cost data.
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