Review this situation: Universal Exports Inc is trying to identify its optimal capital structure. Universal ExportsInc has gathered the following financial info to help with the analysis.
Debt Ratio: 30%, 40%, 50%, 60%, 70%
Equity Ratio: 70%, 60%, 50%, 40%, 30%
rd: 7%, 7.2% 7.7%, 8.9%, 10.3%
rs 10.5%, 10.8%, 11.4%, 12.2%, 13.5%
WACC 8.61%, 8.21%, 8.01%, 8.08%, 8.38%
What capital structure shown in the preceding table is Universal Exports Inc's optimal capital structure?
Answers:
Debt Ratio = 60% ; Equity Ratio = 40%
Debt Ratio = 40% ; Equity Ratio = 60%
Debt Ratio = 50% ; Equity Ratio = 50%
Debt Ratio = 30% ; Equity Ratio = 70%
Debt Ratio = 70% ; Equity Ratio = 30%
The optimal capital structure is the one that (Minimizes or Maximizes) the WACC and (Minimizes or Maximizes) the firms stock price. Higher debt levels (Increase or Decrease) the firms risk. Consequently, higher levels of debt cause the firms cost of equity to (Increase or Decrease).
Axis Chemical Co has found that its expected EPS is maximized at a debt ratio of 45%. Does this mean that Axis Chemical Co's optimal capital structure calls for 45% debt?
-YES
-NO