From the information below, select the optimal capital structure for Minnow Entertainment Company.
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A. B. C. D. E.B
Since the optimal capital structure is the one that maximizes the price of the firm's stock, and minimizes the firm's WACC, this would be the optimal capital structure.
To determine the optimal capital structure for Minnow Entertainment Company, we need to consider various factors such as debt-to-equity ratio, earnings per share (EPS), and stock price. The optimal capital structure aims to maximize shareholder value and minimize the cost of capital.
Let's analyze each option:
A. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
B. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
C. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
D. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
E. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
To determine the optimal capital structure, we need to consider the trade-off between debt and equity. Higher debt can lead to higher financial risk due to interest payments and potential bankruptcy risk. On the other hand, higher equity can dilute earnings and decrease return on equity.
EPS and stock price also play a role in assessing the capital structure. Higher EPS indicates higher profitability and potential for increased shareholder value. A higher stock price suggests market confidence and perceived value.
Based on the given information, we can compare the options:
Option A: Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
Option B: Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
Option C: Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
Option D: Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
Option E: Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
To evaluate the options, consider the following:
Debt-to-equity ratio: A lower debt-to-equity ratio generally indicates lower financial risk. Options A and B have higher debt ratios (80% and 60%) compared to the others.
Earnings per share (EPS): A higher EPS indicates higher profitability and potential for increased shareholder value. Option A has the highest EPS at $3.42.
Stock price: A higher stock price suggests market confidence and perceived value. Option B has the highest stock price at $31.20.
Considering the above factors, there is no clear-cut answer without more context. The optimal capital structure depends on the specific goals and risk tolerance of Minnow Entertainment Company.
If the company prioritizes higher profitability (EPS), Option A with a debt ratio of 80%, equity ratio of 20%, and EPS of $3.42 could be considered.
If the company values market confidence and perceived value (stock price), Option B with a debt ratio of 60%, equity ratio of 40%, and stock price of $31.20 could be a consideration.
However, it's important to note that this analysis is based on limited information, and a comprehensive evaluation would require additional financial and strategic considerations.