Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below.
- Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below.
Debt/Total Assets (%) Expected EPS (RM) ks (%)
20% $2.50 15.0%
30 3.00 15.5
40 3.25 16.0
50 3.75 17.0
70 4.00 18.0
Required:
What is the optimal capital structure for ZPC? Show all of your working and explain your answer. (Hints: Capital structure is at the optimum level when WACC is at the lowest; hence ZPC stock price is at the highest – to apply DCF method here)
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